Should you invest during ghost month?

It’s that time of the year again when investors commonly avoid the stock market due to the superstitious belief that the onset of the Chinese ghost festival in August may bring bad luck on their investments.

During this period, which traditionally falls between the last week of July and the middle of September as set by the Chinese lunar calendar, stock prices are perceived to be weak due to a decline in buying activities.

This year, the hungry ghost period starts on Aug. 11, and will end on Sept. 9. Stock markets around the region, particularly those that are dominated by Chinese investors, are expected to slow down as well. But should you also take things easy during this time?

It has been shown by historical experience that the fear of the ghost month has hardly affected the Philippine stock market. In fact, based on the past 19 years, the PSE index has mostly ended higher with an average return of 4.1 percent in more than two-thirds of the time.

Even if we reduce the sample period for the past 10 years since 2008, the same pattern would occur with the PSE Index ending the ghost month at a positive 4.0 percent in 70 percent of the time.

Moreover, it has been observed that whenever the PSE index closes the ghost month on a positive note, there is a very good chance at 69 percent probability that the upward trend will continue in the next two months with cumulative returns of up to 7.1 percent.

Last year, the PSE index ended the ghost month at positive 1.8 percent return following the law of averages. And as expected, the rally carried the PSE index to gain 4 percent more in the following month.

By the same token, if the PSE index closes lower at end of the ghost period, there is also a 67-percent chance that it will sustain its downward momentum to lose further by as much as 7 percent in the following two months.

With the PSE index having seemingly bottomed out at 6,900 level recently, possible market consolidation during the ghost month may provide great buying opportunities for a potential rally beyond 8,100 level towards yearend.

Given the historical tendency of the stock market, what are the reliable equities that you can consider buying during the ghost month?

Among the 30 stocks that constitute the PSE index, there is only one stock that has almost always emerged as winner from the ghost month for the past 10 years with 80 percent probability. This stock is none other than SM Prime Holdings, which has generated an average return of 3.7 percent.

The other PSE index stocks that have historically beaten the ghost month with 70 percent probability are Jollibee with average returns of 5.4 percent; ICTSI, 9.3 percent; Bank of Philippine Islands, 6.9 percent; Aboitiz Equity Ventures, 1.1 percent; First Gen, 10.8 percent and Alliance Global, 11.6 percent.

The next set of PSE index stocks with 60 percent track record include Ayala Corp, 9.1 percent; Ayala Land, 8.4 percent; Aboitiz Power, 6.3 percent; BDO Unibank, 3.7 percent; Metro Pacific Investments, 4.4 percent; Security Bank, 8.6 percent and Universal Robina, 7.2 percent.

Note that while empirical evidence shows that these stocks may have performed positively in the past contrary to market superstition, there is always the risk that they may not continue to do well in future.

Picking stocks based on past performance is just the first step. It should always be complemented with reasonable expectations about future growth of the company. When there is growth, risk is lower and potential returns are higher.

The thought of ghosts and spirits of the dead roaming around during this period to visit their living descendants may be scary indeed, but there is no reason why you should not take advantage of this opportunity to invest.

Amid all the fear of bad luck, this month could be your lucky month.