Last Updated on December 29, 2021 at 12:06 pm
Here is how you can create your own low volatility, momentum stock list with this download from the NSE published each month. Each month I hope to publish such a list (see: Nine momentum stocks with low volatility for 2019), but here is how you DIY this.
What is the meaning of momentum stock?
Momentum investing essentially means identifying stocks that have moved up considerably in the past 6-12 months and investing them in the hope that the trend will continue into the future. It is hope on the basis of past research as discussed here for the Indian and US markets: Momentum Stock Investing in India: Does it work?.
What is the meaning of a low volatility stock?
Low volatility investing refers to identifying stocks with low price fluctuations and investing in them. Again this is based on past evidence: Low volatility stock investing: Does it work? Higher returns at lower risk?
As discussed in the first link above, there is a close connection between momentum investing and low volatility. In fact, most momentum stock picking strategies also include a way to filter out stocks based on volatility. That is, they prefer stocks that have moved up in the past (= momentum) with low volatility. Another idea that is closely related is to hunt for stocks that have stayed close to their all-time price highs.
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How to create your own low volatility momentum stock list
Step 1: Go to the latest NSE monthly report
Step 2: Download the market cap, weight and beta for Nifty 50 and Nifty 100.
Step 3: Combine the two lists together and turn on Excel data filter (click the funnel icon on the data tab)
This is how each list would look:
You will get:
- weightage in the index
- free float market capitalization
- Beta a measure of how volatile the stock is with respect to the index (Nifty or Nifty next 50)
- Volatility: a measure of absolute volatility of fluctuation in daily price of the stock
- R2 or R-squared a measure of how much the stock price movement is correlated to that of the index. Beta is useful only if R2 is high.
- monthly return
- average impact cost which is a measure of the stocks liquidity
The beta, R2 and volatility is measured for the last one year trailing. So if we get the Dec monthly report the calculation will be from Jan 1st to Dec 31st of that year.
Step 4: Now we start the analysis. The highest R2 is only 0.44 and it drops rapidly below that. This means that no individual stock movement correlates well with that of the index. This also means that the beta values are not of much use.
Step 5: Sort the data by ascending or descending volatility and choose the top 10 or 20 or 30 stocks with lowest volatility
| NHPC Ltd. |
| Procter & Gamble Hygiene & Health Care Ltd. |
| HDFC Standard Life Insurance Company Ltd. |
| HDFC Bank Ltd. |
| Tata Consultancy Services Ltd. |
| I T C Ltd. |
| Container Corporation of India Ltd. |
| ICICI Bank Ltd. |
| The New India Assurance Company Ltd. |
| State Bank of India |
| Bharti Infratel Ltd. |
| Cipla Ltd. |
| Hindustan Zinc Ltd. |
| IndusInd Bank Ltd. |
| Petronet LNG Ltd. |
| Larsen & Toubro Ltd. |
| Cadila Healthcare Ltd. |
| Power Grid Corporation of India Ltd. |
| Tech Mahindra Ltd. |
| Oil & Natural Gas Corporation Ltd. |
| Reliance Industries Ltd. |
| Britannia Industries Ltd. |
| ABB India Ltd. |
| SBI Life Insurance Company Ltd. |
| Oil India Ltd. |
| Dr. Reddy’s Laboratories Ltd. |
| Bank of Baroda |
| Bosch Ltd. |
| Hindustan Unilever Ltd. |
| Bharat Petroleum Corporation Ltd. |
Step 6: Download the trailing returns data for Nifty 100 from Value Research
Step 7: Look at the one-year return column and filter stocks with positive returns. This is the simple momentum measure. The ideal way would be to look positive returns and max no of months with positive return. So the quality of the momentum is also good (I do this in my monthly low vol, momentum screeners). So you can use an alternative return sources that lists monthly returns as well.
Step 8: Find out stocks that have low volatility (top 30, above list) and stocks that have given a positive return in the last year. That is your low vol, momentum shortlist.
| Stock Name | 1Y return |
| Tata Consultancy Services Ltd. | 41.27 |
| Britannia Industries Ltd. | 34.99 |
| Hindustan Unilever Ltd. | 31.76 |
| Tech Mahindra Ltd. | 30.34 |
| ICICI Bank Ltd. | 16.05 |
| HDFC Bank Ltd. | 13.85 |
| Dr. Reddy’s Laboratories Ltd. | 7.85 |
| I T C Ltd. | 7.42 |
| Larsen & Toubro Ltd. | 5.5 |
| Procter & Gamble Hygiene & Health Care Ltd. | 4.94 |
Step 9: Make sure the impact cost of the stock is low as even in the Nifty 100 there could be ill-liquid. These are 15 stocks with highest impact cost. Best to either avoid these or have low exposure.
| The New India Assurance Company Ltd. |
| NHPC Ltd. |
| Procter & Gamble Hygiene & Health Care Ltd. |
| General Insurance Corporation of India |
| SBI Life Insurance Company Ltd. |
| ABB India Ltd. |
| Aditya Birla Capital Ltd. |
| HDFC Standard Life Insurance Company Ltd. |
| Container Corporation of India Ltd. |
| Bharti Infratel Ltd. |
| Hindustan Zinc Ltd. |
| Petronet LNG Ltd. |
| Britannia Industries Ltd. |
| Oil India Ltd. |
| Bank of Baroda |
Step 10: Also keep an eye on the free float market cap and sectors in your shortlist. You want your stocks to have a high free float market cap and from different sectors.
Step 11: If you want additional checks, you can conduct financial health checks with The freefincal Excel Stock Screener
Step 12: Repeat this process each month with new NSE monthly report files. If a stock falls out of your low volatility or low volatility and momentum list, you must not hesitate to sell and replace it. Else this method will not work.
As always please do your due diligence.
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