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If history is any guide, the stock market will most likely rally before the year ends.
Since 1985, according to past market data, the Philippine Stock Exchange (PSE) index has always rallied during the last five trading days of the year in about 78 percent of the time, yielding an average gain of 2.8 percent.
A closer look at the last 12 years since 2008 also shows similar findings where a market rally occurred in 67 percent of the time, though at a lower average gain of 2 percent.
But last year, because of the impact of the coronavirus pandemic, the PSE index expectedly failed to rally when it closed 1.8 percent lower after five trading days, the largest year-ender loss since the financial crisis.
Given this historical pattern, there is a good chance that the market will recover from its loss last year.
What is more interesting during this year-end rally is that the momentum from the increase in buying activities in December is normally carried through the first two weeks of the New Year.
During this period, the stock market would almost always follow through with an additional average return of 3.3 percent.
In other words, if you start buying one day before the five-day countdown begins, which starts on Dec. 23, you can probably make 5.3 percent return on the average, if you hold it until the tenth trading day of January.
So, what PSE Index stocks can we consider buying during this rally?
If we will look at the historical performance of the PSE index stocks for the past 10 years, from 2011 to the 2020 pandemic, we will find that there were three stocks that were able to consistently register positive returns in 90 percent of the time during the Santa Claus rally to January.
These are Universal Robina Corp., which generated a median return of 8.45 percent; JG Summit Holdings, 6.33 percent, and Aboitiz Equity Ventures, 5.21 percent.
They were followed by 11 more stocks that made positive returns in eight of the past 10 years.
The first group consists of stocks that generated a median return of at least 3 percent. These are SM Prime Holdings, which made the highest average return of 7.5 percent; Meralco, 5.97 percent; Megaworld, 5.92 percent; PLDT, 5.65 percent; Robinson’s Land, 3.55 percent and ICTSI, 3.52 percent.
The other stocks in the group are BPI, which had median return of 2.9 percent; BDO Unibank, 2.75 percent; Metro Pacific Investment, 2.70 percent; Aboitiz Power, 2.60 percent, and Security Bank, 2.40 percent.
It is interesting to note that some stocks that have performed well in December would succumb to profit-taking, while those that underperformed would play catch-up in January.
While it may be profitable to trade these stocks based on their historical tendencies, bear in mind that the strength of the rally will depend on how positive investors perceive the stocks will perform in the New Year.
Remember that the price of a stock represents market expectations about its future growth.
Investors pay more for stocks when market outlook is positive, resulting in premium, but when market is pessimistic, investors pay less for stocks, leading to discounts.
During the year, we have seen how the value of growth opportunities in the PSE Index declined from a premium of 27 percent at start of 2021 to almost zero, as market sentiment turned negative due to the resurgence of coronavirus cases.
Today, with rising consumer confidence as cases declined to all-time low levels, the value of growth opportunities is back to prepandemic premium of 42.3 percent.
The current strength of the market along with a stable inflation and interest rate should support a powerful year-end Santa Claus rally.
Of course, there are always risks that a rally may not occur. But being aware of the market risks, while being confident of recovery, will help you limit your downside and prepare you for the big opportunities in 2022.
As you take your vacation this holiday season, try to spend time to review your investment this year. Evaluate where you went wrong and learn from your mistakes, so you can improve yourself and become a better investor next year.