Halloween is a little more than a week away, but my neighbourhood recently held a sneak preview for disabled children. They arrived in costumes by the hundreds and enjoyed a safe, yet spookily decked-out, street.
On Bay Street, investors rush in to take frightening risks for the promise of sweet returns. But, sometimes, the risk is worth it because Canadians have been able to profit from momentum stocks for much of the past quarter century.
Today’s search for momentum starts with the largest stocks on the Toronto Stock Exchange (TSX), by market capitalization. It then narrows in on stocks with positive total returns over the prior 12 months, which are put in a tracking portfolio that is refreshed each month.
Buying prior gainers worked well because the portfolio advanced by an average of 12.7 per cent annually from the end of 1999 through to the end of September, 2025. In comparison, the Canadian stock market, as represented by the S&P/TSX Composite Index, climbed by an average of 7.9 per cent annually over the same period.
(The returns herein are based on backtests using data from Bloomberg taken at the end of each month. They include dividend reinvestment but not fund fees, taxes, commissions or other trading costs. The portfolios are equally weighted and rebalanced monthly.)
Looking for large stocks that have climbed in recent times is pretty easy because, on average, there were about 190 stocks (out of the largest 300) that passed the test. The market always had some winners over the period – including during the depths of the collapse of 2008-2009. On the other hand, it also contained more than a few losers even at the best of times.
Investors who were more demanding performed better. Portfolios that stuck to stocks with gains of at least 25, 50, 75, or 100 per cent, over the prior 12 months, generated average annual returns of 15.7, 17.7, 17.0 and 16.7 per cent, respectively, from the end of 1999 through to the end of September, 2025.
The number of stocks in the portfolios declined as the return requirement climbed. For instance, the number of stocks in the portfolio with prior returns of more than 25 per cent averaged about 106. The average number fell to only 22 for the portfolio formed from stocks with prior gains of at least 100 per cent. The latter portfolio experienced months when no stocks passed the test (and it went to cash) but, at other times, it held as many as 107 stocks.
The ebb and flow of the market from bullish to bearish can be seen in the accompanying graph, which shows the number of stocks in the portfolios that required prior 12-month returns of more than 0, 25, 50 and 100 per cent.
These days, the Canadian market is in an excited state based on the number of stocks with outsized returns over the prior 12 months. There are currently 58 stocks in the over-100-per-cent club, 99 in the north of 50-per-cent club, and 237 with at least some gains over the past 12 months.
A relative-momentum portfolio that buys the 10 top performers over the prior 12 months from the largest 300 stocks on the TSX gained an average of 19.9 per cent annually from the end of 1999 through to the end of September, 2025.
But before you get too excited, you should know that it plunged a gut-wrenching 71 per cent after the internet bubble burst in the early 2000s and it fell 60 per cent in the financial crisis of 2008-2009. Nightmares are fuelled by such downturns.
In addition, the method requires a goodly amount of attention and trading from month to month, which means that commissions, spreads and taxes become important considerations.
Simply put, the relative-momentum portfolio isn’t suitable for most investors because it could turn into a horror story.
But particularly aggressive souls might dream of it at this spooky time of year. It’s sort of like the Hansel and Gretel of investing. It might provide a sweet treat, but it comes with the risk of being devoured.
Details on the stocks in the relative-momentum portfolio and the others I follow for The Globe and Mail can be found via this link.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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