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Stocks outperforming the S&P 500 with low volatility
Stocks that outperform the market are more likely to increase in the future that stocks that are lagging and performing worse than the market.
Outperforming stocks carry also higher risk and we should be particularly careful when entering positions in one of these stocks. Many reasons could explain why a stock outperforms the market, it could be because the company released a better than expected earning numbers or because of good news or because a well-known technical pattern appeared in the stock prices. The main thing here is to buy outperforming stocks that have the lowest volatility and therefore carry the least risk.
The screen is aimed to return stocks that are outperforming the S&P 500 index and that have a low volatility and therefore risk.
The outperformance is calculated by taking the difference between the 30-bar stock return and the 30-bar return of the S&P 500 index.
The volatility is measured by calculating the 30-bar standard deviation (square root of the variance) of stock prices. It could also be measured using beta (Relation between the stock and the market returns).
The trading screen returns stocks that meet the following conditions:
- Stock price higher than $2
- Stock outperform the S&P 500 index
- Stock's volatility, as measured by the standard deviation, is lower than 0.5
A stock that outperforms the market and has lower volatility is more likely to increase in the future. This is at least what the backtests I have performed showed me (Simulations based on the historical EOD data of U.S. stocks).
