The Quantitative Momentum Strategy (QMS) is based on decades of academic research showing that stocks with the strongest recent returns tend to continue outperforming over the next 3–12 months — a phenomenon called the momentum factor. This strategy systematically selects the top 20% of NSE stocks by 12-month momentum and rebalances monthly, without any discretionary judgment.
The Academic Foundation
The momentum factor (also called the "MOM factor") was documented by Jegadeesh and Titman (1993) and has been shown to generate excess returns in virtually every global equity market studied — including NSE. The basic principle:
- Stocks that have outperformed over the past 12 months (excluding the most recent month) tend to continue outperforming over the next 3–12 months
- This is not a short-term mean-reversion (1-month) but a medium-term continuation (3–12 month) effect
- The strategy works because it takes time for information to be fully priced into stocks — strong earnings and business momentum take months to fully reflect in prices
Strategy Construction
| Step | Action | Detail |
|---|---|---|
| 1. Universe | Filter the NSE stock universe | NIFTY 500 stocks with market cap above ₹1,000 Cr and avg daily volume above ₹5 Cr |
| 2. Momentum Score | Calculate for each stock | 12-month return excluding the most recent month (months 2–13) |
| 3. Rank | Rank all stocks by momentum score | Descending — highest return at top |
| 4. Select | Select the top 20% | Top 100 stocks from the NIFTY 500 universe |
| 5. Portfolio | Equal-weight the selected stocks | Each stock gets 1% of capital (100 stocks × 1% = 100% invested) |
| 6. Rebalance | Monthly | First Monday of each month — sell dropped stocks, buy new entrants |
The Momentum Score Formula
Momentum Score Calculation
Momentum Score = (Price 12 months ago ÷ Price 1 month ago) − 1
Note: We EXCLUDE the most recent month to avoid short-term mean reversion
Risk Controls for QMS
Essential Risk Filters:
1. Market regime filter: Only buy momentum stocks when NIFTY 500 is above its 200-day SMA
2. VIX filter: Reduce to 50% exposure when India VIX is above 25
3. Individual stop loss: Exit any stock that falls 15% from purchase price before rebalance
4. Minimum liquidity: Never hold a stock whose avg daily volume falls below ₹2 Cr
The market regime filter dramatically reduces drawdown during bear markets — when the overall market is in a downtrend, momentum stocks still tend to fall.
1. Market regime filter: Only buy momentum stocks when NIFTY 500 is above its 200-day SMA
2. VIX filter: Reduce to 50% exposure when India VIX is above 25
3. Individual stop loss: Exit any stock that falls 15% from purchase price before rebalance
4. Minimum liquidity: Never hold a stock whose avg daily volume falls below ₹2 Cr
The market regime filter dramatically reduces drawdown during bear markets — when the overall market is in a downtrend, momentum stocks still tend to fall.
Expected Performance on NSE
| Version | Historical CAGR (approx) | Max Drawdown (approx) |
|---|---|---|
| Basic QMS (no filters) | 18–22% | 45–55% |
| QMS + Market regime filter | 16–20% | 25–35% |
| QMS + Regime + VIX filter | 15–18% | 20–28% |
Practical Implementation on NSE
- Capital required: Minimum ₹10–₹15 Lakhs for adequate diversification (100 stocks at ₹10,000–₹15,000 each)
- Rebalancing cost: ~20% turnover per month → approximately 2.4× annual turnover → significant brokerage and STT — factor this into your backtest
- Simplified version: Select top 20–30 stocks instead of 100 — reduces complexity while maintaining most of the momentum premium
The simplified QMS with 20–30 stocks is more practical for individual NSE traders. Use the Momentum IQ screener to rank NIFTY 500 stocks by 12-month performance each month, select the top 20–30, and rebalance on the first Monday of each month. Backtest this approach using the batch backtesting feature on the Quant plan.