Did Dark Pool Data Call A Bottom In Nvidia?
After Citron Research turned bearish on Nvidia (NVDA) at the end of December, we posted ways for longs to limit their downside risk (Locking In Nvidia Gains). After Nvidia shares had dropped double digits, at the beginning of March, we posted an update showing how one of those hedges had ameliorated the decline. In that update, we noted that institutions were accumulating Nvidia shares in dark pools:
What Next For NVDA?
To get sense of that in the short term, we pulled up NVDA’s chart on Squeeze Metrics (we have an affiliate partnership with them, and are compensated if a reader joins the site).
We’ve highlighted Thursday’s column in the histogram above, so you can see its data in the box at the top left. The DPI, or Dark Pool Indicator, was 57% on then; i.e., 57% of the dark pool trades in NVDA were buys on Thursday (you don’t often see the same number of buys and sells in dark pools, because some sales are routed to other markets by intermediaries such as high frequency trading firms). A DPI over 50% is considered bullish. NVDA had a bullish DPI in 9 of the last 10 trading days, and the one other day during that period the DPI was neutral (50%). That, plus the negative GEX, or gamma exposure, on Thursday, suggests NVDA may have an uptick in the near future: the gamma exposure of -264,346 shares means that’s how many shares of NVDA option market makers will need to buy back for every 1% the share price goes up.
Since then, shares of NVDA have climbed about 10%:
Questioning The Reliability Of Dark Pool Data
So it’s possible that dark pool data did reflect an inflection point here. But, as with any indicator, it has to be viewed critically and contextually. That was highlighted by a recent comment by reader “Sanibel” on a November article we wrote on Alphabet (GOOG, GOOGL):
As we noted in a reply there, no indicator is going to be reliable all the time, but what we’ve started to do since that November article is look less at dark pool data from one trading day, even if it represents a one-standard-deviation move in activity, as was the case with Google, and more at dark pool activity over the most recent ten trading days (as we did with Nvidia last month). That’s not going to be reliable all the time either, but we think it might be more instructive.
More generally, it’s worth considering the context of why we’d want to pay attention to dark pool data. Essentially, it’s the inverse of the old Odd Lot Theory (which holds that the small investor is always wrong). Dark pool investors are hedge funds and other institutions: the opposite of small investors. The idea is that they are going to be right more often, so it’s worth paying attention to what they’re buying and selling. But as we have highlighted before (Maybe You Should Panic), the big investing gurus get it wrong too, sometimes spectacularly so. With that in mind, let’s take an updated look at the dark pool data on Nvidia.
Current Dark Pool Data Still Bullish On Nvidia
Here’s an updated 10-day chart from Squeeze Metrics:
The DPI, or Dark Pool Indicator, was in bullish territory on Friday; it was also bullish on 7 of the last 10 days.
The Portfolio Armor Website Still Bullish On Nvidia
The Portfolio Armor website, which uses underlying price action and option market sentiment to estimate potential returns was bullish on Nvidia as well. As of Friday, it estimated a 31% potential return over the next 6 months. Bear in mind that this is a high-end estimate: Historically, actual returns have averaged about 0.3x the site’s potential return estimates.
In Case We’re Wrong
If you’re long Nvidia, but want to limit your downside risk in the event our bullishness ends up being wrong, here’s a low cost way of doing so, if you’re unwilling to risk a decline of more than 18% over the next several months. We used the Portfolio Armor iOS app to find this optimal collar hedge, but you can find them without the app using the iterative process outlined here.
As of Friday’s close, this was the optimal collar to hedge 1,000 shares of NVDA against a greater-than-18% decline by mid-September, while not capping your potential upside at less than 23% by then.
Above you can see the cost of the put leg of this collar was $3,700, or 3.4% of position value (calculated conservatively, using the ask price of the puts). But as you can see below, the income generated from selling the call leg was $3,450, or 3.17% of position value (calculated conservatively, using the bid price of the calls).
So the net cost here was $250, or 0.23% of position value, calculated conservatively. Since you potentially could have bought the puts for less and sold the calls for more (at some price between the bid and ask in both cases), it’s possible you would have paid less than $250 for this hedge.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.