Will there be a stock market rally by yearend?

If we will follow the historical behavior of the stock market every December, there is a good reason to believe that share prices will rally before the year ends.

Since 1985, according to past market data, the PSE index has always rallied during the last five trading days of the year in about 79 percent of the time, yielding an average gain of 2.9 percent.

A closer look over the last 10 years since 2009 also shows similar findings where a market rally occurred in 80 percent of the time, though at a lower average gain of 1.9 percent.

But last year, the PSE index failed to rally when it closed 1.5 percent lower after five trading days. Incidentally, the last time the market fell short was in 2013, which was five years ago.

Prior to this, it was also five years earlier in 2008 when the PSE index ended the year with a loss. Given this historical pattern, there is a reasonable chance that the market will not disappoint this year.

What is more interesting during this so-called Santa Claus rally is that the momentum from the increase in buying activities from December is normally carried through the first week of the New Year.

The same historical data for the past 10 years show that share prices continue to go up during the first 10 days of the new year with an additional average gain of 3.4 percent in 80 percent of the time.

In other words, if the start of the five-day countdown is Dec. 19, which is tomorrow and you start buying today, you will likely get a 5.3-percent return, on the average, if you hold it until the 10th trading day of January.

Alright, so how can we possibly take advantage of this seasonal anomaly? What stocks are most likely to pick up during this rally?

If we will look at the historical performance of the PSE index stocks for the past 10 years, only Universal Robina Corp. was able to register positive returns consistently year-after-year from Santa Claus rally up to the mid-January with a median return of 9.3 percent.

This was followed by five other stocks that posted positive returns in nine out of the past 10 years, which are JG Summit with median return of 7.6 percent; Aboitiz Equity Ventures, 7.2 percent; Semirara Mining, 4.0 percent; BDO Unibank, 3.4 percent and Security Bank, 2.6 percent.

Other stocks on the list that gained 80 percent of the time were GT Capital, 3.0 percent; Robinsons Retail, 2.4 percent; SM Prime Holdings, 7.5 percent; San Miguel Corp, 4.4 percent; Aboitiz Power, 3.3 percent; and BPI Bank, 2.9 percent.

While it may be profitable to trade these stocks based on their historical tendencies, bear in mind that the strength of the rally shall depend on how positive investors perceive the stocks to perform in the New Year.

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 went down to 41 percent from 48 percent the previous year due to high interest rates and inflation.

But when interest and inflation rates started to fall in February this year, the value of growth increased to 43 percent as the PSE index rallied to 8,200 level.

However, when the trade war escalated and began to affect the global markets, the market became pessimistic about growth outlook despite the improving macroeconomic fundamentals.

Today, the value of growth in the market is only 18 percent, which is way below average of 48 percent, while the earnings yield, which is the reverse of market PE ratio, is way above the interest rate at 7.2 percent.

While there are risks that a rally may not occur, the current undervalued metrics of the market should provide enough support for share prices to recover at least in the short term. INQ