Will the stock market rally into the yearend?
If history is any guide, the stock market will most likely end the year on a high note.
Since 1985, historical statistics have shown that the PSE index has rallied toward the last five trading days of the year in about 82 percent of the time.
During this so-called Santa Claus rally, share prices gain an average of 2.9 percent. Last year, the PSE index also closed out the year with a gain of 2.3 percent.
The last time the market failed to end on a positive note was in 2013 when the PSE index closed lower by only 0.5 percent while the largest year ender loss was 1.5 percent during the 2008 financial crisis.
What is more interesting during this yearend rally is that the momentum from the increase in buying activities from December is normally carried through the first week of the New Year.
Again, the same historical data will show that the market has almost always opened the year on a strong note where share prices would close higher with an additional average return of 3.5 percent in 62 percent of the time.
In other words, if you start buying one day before the five day countdown begins, which starts on Dec. 20 this week, you will likely gain at least 4.3 percent in total, on the average, if you hold it until the first week of January.
So what stocks should you consider buying during this rally?
Following historical track record, based on the past 10 years since 2008, only San Miguel Corp. has achieved 100 percent positive performance year-after-year with average returns of 6.2 percent during the five-day rally.
The index stocks that have gained in nine of the past ten years were Alliance Global with average returns of 5.7 percent; DMCI Holdings, 4.8 percent; Megaworld, 4.5 percent; BPI, 2.8 percent and Aboitiz Power, 2.5 percent.
Other stocks on the list that have closed higher in 80 percent of the time were JG Summit with median returns of 6.6 percent; Metrobank, 7.3 percent and SM Prime Holdings, 4.4 percent.
Now, not all stocks that have consistently closed higher by year-end would continue to be strong by first week of January.
Some stocks that performed well during December would succumb to profit-taking while those that underperformed would play catch-up.
Among the most consistent index stocks that have closed positively in eight of the past 10 years during the January effect were BDO, which gained an average returns of 3.1 percent; SM Investments, 3.1 percent and Semirara Coal, 3.7 percent.
While it may be profitable according to historical tendencies to take advantage of these market anomalies, bear in mind that the strength of the advance shall always depend on how positive investors expect the New Year to unfold.
Remember that the price of a stock represents market expectations about the future growth of a company. The value of growth opportunities is one of the two components that make up the price of a stock.
Almost the same time last year, the average value of growth of PSE index stocks was about 48 percent.
When the market fell due to rise in interest rates this year, the value of growth as a percentage of share prices also decreased as the investors became more pessimistic about growth outlook.
This brought the average value of growth to only 41 percent this month as interest rates remain relatively high compared to last year.
But if rates are expected to fall due to lower inflation, then growth expectations must increase.
If the average value of growth reverses to its historical mean of 48 percent, then the PSE index should go up by at least 10 percent in the near term to at 8,200-level.
While there seems to be strong historical support for a market recovery toward the New Year, bear in mind that there is always a risk that market direction may not turn out the way we expected.
