Anticipating Reversals By Understanding Institutional Positioning

Summary

• Institutions establish positions and then defend them, and the levels at which their largest trades arrive can be used to establish bias and define risk. 
• Positioning precedes trend reversals. Understanding when and where institutions trade with conviction provides valuable insight.
• With 20 years of trade data across 5000+ tickers, Volumeleaders.com reveals institutional positioning and provides context and visualizations to better understand these trades. 

Intro

As the rally off the October 2022 lows raged on through the summer of 2023, I began to see bearish positioning in QQQ QQQ and growth stocks that suggested the rally would soon be ending. In this article I will walk you through how I used Volumeleaders.com to detect changes to institutional positioning which preceded a trend reversal.

Context / Metrics

Institutions trade with size and leave footprints wherever they go. Within these footprints lies valuable information. Volumeleaders.com captures these large trades and then calculates several custom metrics to help subscribers understand more about their size, rarity, and uniqueness.  Among these metrics are trade rankings, which I’ll be discussing in this article. 

Any time a large trade is logged by volumeleaders.com, it’s ranked by dollars against all other trades of the same ticker going back 20 years.  Any trade ranked in the top-100 is annotated as such.  When these ranked trades arrive, they tell us institutions are unusually active and positioning themselves with enough size and conviction that we can expect a meaningful move. What constitutions ‘large’ is relative to each ticker as each behaves uniquely.  But the one thing they all have in common is that large trades tend to arrive at or near relative highs and lows and precede large magnitude moves.  If we can detect and infer the intent behind those large trades, we can position ourselves accordingly. 

In each of the charts below, trade rank is displayed on the bubble representing each trade. 

Leveraged ETFs

One of the most common and reliable patterns observed when watching institutions trade is that of leveraged ETFs. Typically, the pattern unfolds like this:

• One or more disproportionately large leveraged ETF trades arrives.
• Price makes one more nominal high or low in the direction of the current trend.  Sometimes a reversal begins immediately. 
• Price reverses and breaks above/below the level at which the large leveraged trade arrived signifying that the current move has ended. 

One reason for this behavior is that institutions trade leveraged ETFs only during the sharpest moves in either direction. This is due to the inherent decay and risk associated with holding leveraged ETFs for longer periods of time. Institutions trade in very large sizes and can’t get their orders filled at the absolute highs and lows of a given move because there isn’t sufficiently liquidity at the edges. But they can get filled just above the lows and below the highs. That’s the zone in which they typically operate. 

However, in this case we got a rare gift because both the bull ETF and the bear ETF arrived with unusual size at the same time suggesting that institutions were repositioning themselves from long to short. There was no new nominal high in TQQQ nor a nominal low in SQQQ.  Price immediately reversed and a new downward trend began in QQQ.    

Below are charts from July 18, 2023, showing TQQQ TQQQ printing a disproportionately large trade near relative highs suggesting longs were closed and SQQQ SQQQ printing a disproportionately large trade near relative lows suggesting shorts were opened. 

The Underlying

QQQ is the underlying ETF upon which TQQQ and SQQQ are based. Two weeks after the disproportionately large trades arrived in leveraged ETFs, price had made a lower high. That’s when the 2nd largest QQQ trade since inception printed. The timing and location of this trade suggested institutions had initiated a large short position. Institutions buy low and sell high. Probability favors a large position arriving after a 10-month rally to be bearish in nature. Institutions don't typically deploy capital of this size at highs.  

As the days wore on, institutions added other large short positions as shown below. Each of these trades ranked in their respective top-100 and kept price moving lower.  As price remained below each print, one could conclude these were bearish positions. Had they been bullish positions, price would not have traded lower and remained lower. Institutions always defend their positions. 

Bearishness wasn’t limited to QQQ though. Analysis of the mega-cap growth stocks revealed similar bearish positioning. See the charts below with notes on each.

TSLA TSLA

MSFT MSFT

AAPL AAPL

META META

IWY IWY – Growth ETF weighted heavily toward growth stocks (AAPL, MSFT, AMZN, GOOGL, etc.)

Conclusion

As August began, sentiment had been wildly bullish with many expecting indexes to see all-time highs soon. But beginning in June and July, institutions began quietly distributing their shares in growth stocks and positioning themselves for a bearish reversal.  We’re seeing those outcomes now. 

I don’t know how long this decline will last, or how far down institutions intend to take price. But I’ll be waiting patiently for disproportionately large trades to appear at or near relative lows to suggest that institutions are repositioning themselves once again so that I can do the same. 

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