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Quant Structure of the Market (November’17- a classic case of Mean Reversion): 6 Stocks to go Long

Education Series | December 13, 2017

Recap of November 2017: Nifty fell by 1.05% during the month; Nifty 500 grew by 0.01%while Nifty Mid Cap and Nifty small cap gained 1.62% and 1.90% respectively.

In terms of sector, Consumer Discretionary, Consumer Staples, Information Technology and Industrials rose by 3.33%, 1.36%, 3.29% and 2.09% respectively while Energy, Materials, Health Care, Financials, Telecom and Utilities fell by 3.67%, 2.05%, 1.44%, 0.39%, 3.54% and 1.12% respectively.

The month of November was a classic case of Mean Reversion i.e stocks which were gaining in last few months performed poorly while stocks which were losing during last few months performed well during the month. Stocks with Earning Score (ES) above 70 (at the end of October) rose by a median of 0.80% whereas stocks with Earning Score (ES) below 30 (at the end of October) grew by a median of 2.55%.

Stocks with Price Score (PS) above 70 (at the end of October) rose by a median of 0.33% whereas stocks with Price Score (PS) below 30 (at the end of October) grew by median a of 2.64%.

3 Long Stocks

If any stocks with high Earning Score (preferable above 65) is trading with poor Price Score (below 40) and if for any period (say a month) positive price momentum comes then it usually signals revival in that stock price.  For the month of October 2017, Nifty gave a return of 5.59%, so the appropriate price momentum level for October was more than 7%. So, the below-given stocks were the appropriate shares to go long for November:

And these are the stocks that gave an average return of 6.46% in November.

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Atul MishraAdvanced Market

Atul works with an Advanced Market Research Group at Narnolia Research. His forte is quantitative research on Indian equities. He is a computer science graduate with Masters in Finance from Faculty of Management Studies, Banaras Hindu University.

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