Will the stock market rally before the year ends?

It is that time of the year when the market goes through a period of month-long correction. This usually starts at the beginning of November extending up to December right before the Christmas holidays.

Over the past 20 years, based on PSE historical data, the stock market typically declines in November 70 percent of the time by an average of 3.3 percent.

This year, true to the law of averages, the market lost 4.07 percent by the end of November after peaking to an all-time high of 8,605 at the start of the month. The PSE index continued to fall on Dec. 1, signifying further decline after failing to hold at 8,200.

Market history shows that this seasonal correction may prolong up to the third week of December as evidenced by tendencies of the PSE index to fall during this period, losing an average of 2.7 percent for each of the last five years since 2012.

Judging from the recent break down, it is likely that the PSE index may decline further toward the psychological 8,000 support or even lower at 7,800 level.

It is interesting to note that in the same historical period, over half of PSE index stocks have consistently declined in four out of the last five years with an average loss of 4.35 percent.

Among the top losers were Robinsons Land (-5.9 percent), Ayala Land (-5.5 percent), Ayala Corp (-5.0 percent), First Gen ( -4.8 percent), Petron (-4.6 percent), Universal Robina (-4.6 percent), Globe Telecoms (-4.5 percent) and ICTSI ( -3.8 percent).
Why do investors sell during this period?

There are numerous explanations for this but one could be due to the belief that institutional investors and traders sell their losing positions to book their capital losses for tax purposes.

But once the selling is done, the cash raised from the proceeds would be used to buy back shares to begin rebuilding their portfolio for next year.

This happens during the last five trading days of the year when the so-called Santa Claus rally historically occurs. During this period, investors start to accumulating stocks in anticipation of a surge in stock prices in January.

Mutual fund managers and insiders from publicly listed firms also buy some shares to drive up the market value of their holdings to show better performance by year-end.

A review of the last five trading days of December for the last 32 years since 1985 shows that the market has always rallied toward the end of the year 81 percent of the time, gaining an average gain of 2.95 percent.

A closer look in the last five years presents similar findings: a rally occurred 80 percent of the time and the average return was about 1.76 percent.

Historical data show that 10 out of the 30 PSE index stocks have always rallied during the market recovery in four of the last five years. These are Semirara Coal (+3.95 percent), SM Investments (+3.79 percent), Universal Robina (+3.30 percent), Ayala Corp (+2.75 percent), Puregold (+2.64 percent), BDO (+2.63 percent), ICTSI (+2.25 percent), JG Summit (+2.18 percent), Metrobank (+2.07 percent) and Aboitiz Equity Ventures (+1.7 percent).

Is this a good a time to buy?

Following historical tendencies, there is good reason to expect that the market will recover before the year ends. The current weakness in the market should be a great opportunity to accumulate stocks, while share prices are relatively low, in preparation for next year.

If you start buying now before Dec. 22, the first day of the last five trading days of the year, there is a high probability that you will earn positive returns by the first day of the New Year.

Keep in mind that while there seems to be strong statistical support for a market recovery in the last week of December, there will always be a chance that the law of averages may be violated given the current bearish sentiments in the market.