We’re just several days away from Christmas day and the market still continues to move in some uncertain ways. The impact of a wide-ranging combination of both fundamental and technical factors seem to send mix reactions into the market that it’s still a toss-up between a “Santa Claus Rally” and a “Dead Cat Bounce” to end the year.  

Trading results up to last Wednesday, December 4, continue to be soft so that while the market has made some small upticks, it can still be considered generally on the downtrend. This is a trend that started to emerge when the market hit its technical exhaustion point.  

Looking back, this apparently happened on the 41^st week of the trading year. To be exact, this occurred on October 7, Monday, when the main index hit 7,604.61 — the market’s highest recorded high for the year so far.  

Stepping a little backwards on Friday of the 40^th week for more hindsight, it will be noticed that the market closed the day at its session high of 7,467.92. It ended with a minimal weekly gain of 0.53% or 39.62 points only. Interestingly, the market reflected a year-to-date (YTD) net gain equivalent to 15.78% or 1,017.88 points. To this day, this is the market’s highest level of advance and gain since the beginning of the year.  

At the close of the 48^th trading week on November 29, the market settled at 6,613.85 and ended once again on losing grounds. This left the market with a YTD net advance of 2.54% or 163.81 points only.  

For added context, the market lost as much as 88.58% or 901.60 points of the 1,017.88 points it gained earlier that it was brought back, down to 2.54% or 163.81 points from where it started at the beginning of the year.  

Splitting hairs

While you may be familiar already with what it is, the Santa Claus rally is a seasonal market activity that is expected to happen during the Christmas season. More precisely, this happens between Christmas and New Year’s Day. Sometimes, this extends up to the first two trading days of January of the following year.

This market phenomenon was initially attributed to the yearly “window dressing” practice of institutional investors to book their stock positions at higher prices at the closing days of the year.  

This has evolved significantly in recent times. The Santa Claus rally has become more of an event resulting from the timing and mood of the times. People are abundant with cash and become open to investing their Christmas bonuses. This also happens because people buy stocks at this time in anticipation of the rise in stock prices during the month of January, otherwise known as the “January effect.”

As for me, the explanation I love most is that the Santa Claus rally happens because the market bears and pessimists are out on vacation.  

Seriously, the Santa Claus rally can also be used as an early indicator of what may happen in the new year.

The rise of the market during this time of the year could also be attributed to what is called a “Dead Cat Bounce.” This is a temporary recovery from a prolonged market decline, and may apply to what we have been going through for the last two months. But as differentiated from the Santa Claus rally, the market climb is expected to be short-lived.  

The origin of this concept came from the saying that, “Even a dead cat will bounce if dropped from high enough!”  

This kind of market uptrend does not last long, for how much higher can a dead cat bounce literally? Moreover, the event usually occurs in “a major correction or downward trend.” As such, the market is also expected to “almost immediately continue to fall.” 

Variables behind the market’s uncertain status 

One of the variables that is largely behind the market’s current uncertain status is higher inflation rate. The market reverted to bleed when the Bangko Sentral ng Pilipinas (BSP) announced that inflation in November may settle at the 2.2% to 3.0% range.  

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To recall, inflation was 2.3% in October, wherein the market tanked. In September, inflation was only at 1.9% and the market went on the uptick. Remember, the market was declared at this time to have broken out into bull market territory. The market closed at 7,417.25 on September 23, completing a continuous ascend of no less than 20% from its immediate low last June 21.  

Next, is hot money outflows. Transactions on foreign investments registered with the BSP through authorized banks posted a net outflow of $529.68 million in October. This was higher than the $328.19 million outflow in the same month a year ago. This was also a reversal of the $1.03 billion net inflow in September. 

Also, the market slipped at this time abetted by the net selling activities of foreign investors. This trading tack of foreign investors likewise served to undermine the health of the market’s width and breath. It instead scared local investors to increase their market participation.  

Total market transactions have also remained tepid and low. Excluding the impact of rebalancing reflected in cross transactions, the average daily total value turnover of the market ranged between P5.22 to P5.6 billion only. This makes liquidity an additional variable holding back the market.  

The lack of capital raising activities has likewise compounded the situation. The lack of new issues prevented the entry of more money in the market. Moreover, quick profit-taking has also become the trading standard, rendering the market to grow weaker and volatile.

Nevertheless, there are a number of more good reasons that the market’s ascent can still happen and be sustained. The National Economic and Development Authority (NEDA) expects the economy to grow faster in the 4th quarter compared to the 5.2 percent registered in the 3^rd quarter. Forward estimates indicate that the country could still meet its revised target of 6.0 to 6.5% for the year. The economy grew by 6.0% in the first half of 2024, placing it among the top growth performers in the region.  

Monetary easing measures remain to be the government’s primary strategy to bolster economic growth and control inflation. At the moment, money supply looks healthy, imports are up, and retail sales are bouncing. There are also more and more signs that foreign fund outflows are already at their tail-end and may soon reverse into net inflows. The US dollar is starting to weaken — as it has weakened each December for the past 5 years — while global stocks have strengthened an average of 2.5% as per Bloomberg data.

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Suffice to say that hope remains high and there are more reasons solid enough to support a stronger market close for the year. We’ll explore them further in the next article as preface for what we may expect in 2025 and corresponding stock picks.  

In the meantime, the simple consensus among colleagues in the Monday Circle market forum is vivid enough to describe how the market may close for the year: “The market may still be trading soft so that the prospects of a bull run can’t happen that fast, but its small slightly increasing upticks this week leaves enough time for a Santa Claus rally.” – Rappler.com

(The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity.   You may reach the writer at densomera@yahoo.com)  

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