A BMO Capital Markets report reveals that popular bank stock trading strategies, such as the 'reversion to the mean' approach, underperformed in 2024. The report highlights the success of positive price momentum strategies instead.
In this first Market Factors newsletter for 2025, we’ll first compare the relative success of trading strategies for bank stocks , then outline the most important charts for the coming year. The diversion is truly bizarre - an amusement park ride that intentionally kills people - and we’ll look ahead to important data releases.
BMO Capital Markets bank analyst Sohrab Movahedi published a report Monday that not only reviewed the sector’s performance in 2024 but also outlined the relative success of two popular bank stock trading strategies. The bank sector’s 21.8 per cent total return in 2024 outperformed the S&P/TSX Composite by an infinitesimal 10 basis points. CIBC was the best performer, outdistancing the biggest laggard TD by 56 percentage points. The bank sector underperformed the TSX in 2022 and 2023 but has outperformed the broader benchmark 70 per cent of the time during the past 50 years. Performance updates are all well and good but it was Mr. Movahedi’s update on popular bank stock trading strategies that really caught my attention. When I worked with financial advisers, the practice of buying the worst performing bank stock of the previous year – it usually had the added advantage of being the highest yielding - was widespread. The expectation was for a kind of reversion to the mean, the worst performer playing catchup while the top performer lagged. Executing this strategy in an aggressive way by buying 2023’s worst performer (TD) and shorting the best performer (CIBC) would have got an investor killed in 2024 – a loss of 56 per cent on the trade. This strategy would have been profitable only twice in the past decade (two years were flat) and generated an average loss of 7.0 per cent. Reversion to the mean for single bank stocks is no longer a reliable trading strategy, to say the least. Last year was an anomaly in that an approach riding positive price momentum was extremely successful, according to Mr. Movahed
Bank Stocks Trading Strategies Reversion To The Mean Price Momentum Financial Markets
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