The market has been a tough read for market participants, as many are still…
It’s been a wack market… but stocks are finally catching a much-needed bounce today. However, from what I’ve seen thus far, the theme has been big days up are followed by some nasty selling.
At these levels, in my opinion, there could be a huge opportunity for those brave enough to short at this level, the gap up is based almost solely on Trump’s comments that things should reopen in weeks, not months.
I think at this point the market is clinging onto some hope of that, but there isn’t much evidence right now to suggest that’s gonna happen.
For me personally, I’m not going to jump the gun. Instead, I’ll remain patient and continue to follow the smart money. Not only that, but I’ll remain locked and loaded — tapping into the elite trader’s mindset.
At these levels, there are a few indicators I’ll be keeping my eyes on… and it’s as easy as just being at the right place at the right time.
When it comes to executing their trades, smart money tries their best to operating covertly. However, there is technology out there that detects their every move.
I find that it’s easier to figure out exactly what Wall Street’s largest players are doing by following the paper trail, rather than listening to what the talking heads are saying. The thing is, if you really want to follow the whales… you need to understand a few order types.
Since these Wall Street fatcats have large amounts of cash and can throw down millions of dollars on stock trades… they want to hide their moves.
Why?
It could impact the price of the stock or exchange-traded fund (ETF), and their competitors may look to front-run their ideas. So it’s advantageous for them to use order types such as the iceberg order.
So what’s an iceberg order?
Well, it’s perfect for the smart money because it’s designed for players who submit large volume orders, whether it be for stocks, futures, options or warrants. This order type allows them to conceal their full position size.
In other words, it looks to prevent market participants from jumping the gun because they know the demand is popping up.
Quite simply, all they have to do is place their order and change the display size.
Here’s how it works, they could look to buy 1M shares of a stock… but only display 1,000 shares. In other words, they would sit on the bid and the order size that’s shown would only be a measly 1,000 shares.
So it’s like a game of poker… they have pocket Aces, but don’t let people know, so they get less aggressive with their betting.
Let’s take a look at another order type these players use.
The VWAP — Volume-Weighted Average Price — aims to provide market participants with the “best” price. Basically, the trading platform calculates a price based on the volume for a specified period.
In real-time, the algorithm continuously calculates the price from when you submit the order until the close of the market. Sounds great, right? These Wall Street fatcats can just place a VWAP order and step away from the desk, and let the computer do the rest.
The thing is, the market knows what the VWAP is at all times, so it’s a little less covert for these players. Just take a look at the VWAP line on Facebook (FB).
As you can see, the VWAP tracks the movements of stocks very closely. However, if there’s a break above the VWAP line… it’s an indication someone is buying and it could run-up… and if it breaks below… the stock could head lower.
So while the smart money does use the VWAP and iceberg order… it doesn’t provide them with enough anonymity.
Instead, they’ve turned to place block trades in the dark pools.
Quite simply, a block trade is a massive order. However, the actual trade goes a bit differently. It involves a large order that goes off at a specified price and is conducted between two parties (it could be between Wall Street whales, investment banks, hedge funds, or other investment funds).
Since the mathematicians and computer scientists run amok on Wall Street, the smart money has to play outside the open market to prevent the impact on the stock price. Of course, this is done so they can get a better price and not let the financial watchdogs uncover their dirty trades.
However, these block trades can be legally made outside the open market through a private purchase agreement, something you and I simply can’t do because we don’t have that kind of money.
Yet again, the Wall Street elite wins the battle. However, they have not won the war.
Why?
There are proprietary scanners that allow you to detect the moves of Wall Street’s largest players. So we know exactly where they are trying to find ways to make money in the market.
A little Dark Pool activity is beginning to creep back in I’ve noticed. Nothing that is worth getting super excited about just yet but it’s encouraging nonetheless. However, I’ll continue to follow the block trades… and when things stabilize, I’ll be ready to enter a high-conviction trade.
It’s been an absolute mess of a market, and there are no signs of recovery yet. The coronavirus has crippled the global economy, and the U.S. is getting hit hard.
Of course, in times like these, we want to look for the best opportunities out there. So how exactly do I find them?
Well, I turn to the dark pools — the “secret” trading venues where the smart money place their trades. You see, these guys have access to an army of analysts, state of the art technology, and other resources to come up with their best trade ideas.
Especially in this market environment, I find it’s helpful to follow the smart money and try to figure out their moves.
So what exactly are Wall Street’s largest players doing right now, and what can we learn from them?
For those of you who don’t know, dark pools are private venues that only elite traders and investors have access to.
It’s no wonder why dark pools have become so popular amongst the Wall Street “insiders”.
Dark pools are somewhat transparent and they’re not like your traditional exchange.
When you send an order on NYSE or Nasdaq (these are considered “lit” exchanges), all the information is shown… it’s there for the public to see. The price and amount of shares you want to buy or sell are visible.
I’m not naive, so I know there is a lot of information these banks want to hide… and they don’t want the competition to figure out why they’re sizing up in a position.
The pros use dark pools because it allows them to operate in the shadows. Not only that, but they could automate their trading and use high-frequency trading (HFT)… so they could sit back and go about their days.
But the thing is, these fat cats don’t know there is technology out there following their every move, and oftentimes… it detects their massive trades — and many times, it’s AHEAD of a major headline.
That’s right, with the rise of dark pool trading activity… there’s been a bevy of perfectly timed trades.
We all know Wall Street “insiders” place well-informed bets using proprietary information all the time… I’m talking about non-public information that traders like you and I are not privy to.
So they do everything in their power to hide their trades… and dark pools have been one of the “best” places, so they think.
What the well-informed elite probably don’t know is even though their trades are anonymous on dark pools, traders can still figure out their every move. While it’s true we don’t know exactly who’s behind the massive block orders going off in dark pools every single day…
We can still figure out how many shares they want to buy and at what price.
However, in this market environment, I’ve noticed the block trade market for individual stocks has been dead for quite some time. And it’s not due to the fact I haven’t been looking for opportunities, as I’ve been sitting at my trading desk all day waiting for the right opportunity.
This clues me into the idea that nobody is thinking this is the time to jump back in and throw down large bets on single-stock trades. It makes a lot of sense with all the volatility in the environment. The last thing the smart money wants to do is lose money.
With that being said, cash is still the position for me… and I think it is for many of the smart money traders out there. Of course, things can change on a dime, but there’s a possibility of a potential market closure and trading activity could dry up.
Not only that, but NYC may go to shelter status, which could signal that Wall Street would have very little activity.
However, when things do start to take a turn for the better, I’ll be ready and stalking a proprietary block trade scanner that lets me know where the smart money are placing their bets.
If you want to learn more about the benefits of dark pool trading activity, click here to watch this exclusive trading lesson.
With another day of limit down trading… I’ve decided to take a step back and open up a discussion with my readers. I received an overwhelming response and figured it would be beneficial if I let you in on a little secret…
Money flow.
Of course, we see the market is dropping… but large funds are making moves behind the scenes, and when I look at the way capital is flowing in and out of exchange-traded funds (ETFs).
The thing is, when I study the ETF inflows and outflows, I am one step behind… but I do my best to put the pieces of the puzzle together and try to figure out where the best opportunities are.
So what exactly is going on in this market, and what are some of Wall Street’s largest players doing?
Some of the worst-performing sectors last week include: gold miners, oil & gas exploration & production, energy, and home construction. Of course, that all makes sense and it’s a signal to me that traders are shaky and looking for other areas to park their cash in.
While the markets got destroyed last week, U.S. equities actually saw net inflows. Nearly $3B flowed into ETFs during the week. What that tells me is despite the influx of sellers… the buyers are willing to step in at these levels.
The breakdown tells us investors and the smart money could be playing for a massive bounce, as U.S. equity ETFs saw net inflows top $8B last week… with a majority of capital flowing into low-cost index ETFs, such as the SPDR S&P 500 ETF (SPY), iShares Core S&p 500 ETF (IVV) and Vanguard S&P 500 ETF (VOO).
On the other hand, market participants seem to be shaky when it comes to international equity ETFs… as more than $4.5B flowed out of the funds. This probably stems from the fact that the coronavirus cases exploded in Europe seemingly overnight, as well as the shut down in Italy.
Of course, there are opportunities out there… but remember, the smart money has deep pockets and for them, it’s easy to continue buying.
The one question many traders have on their minds right now is, “Should we start buying the dip?”
Well, to be frank, I can’t tell you what to do with your money. The only thing I could tell you is what my plans are.
For now, I’m going to remain in cash, but still stalk the market for high-probability setups. You see, patience is key in this market environment… and that means not trying to be a hero at these levels.
At the end of the day, it’s okay to forgo opportunities until things start to make sense. Right now, if you just take a look at some of the ETFs out there… there are so many disconnects.
Until I see something pop up on my dark pool indicator, I’ll remain on the sidelines… but still watch the markets. If you’re having trouble with this market environment… or took it on the chin, check out this episode of the WealthWise Podcast in which I detail how to develop the right mindset in this market environment.
