FX Evolution: Retail Panic = Wall Street Profit

Financial markets don’t move in a straight line. But there are recurring patterns that investors can follow to get a sense of where markets are going.

One such strategy is to follow fund flows. That data is widely available. And investors can separate it out between institutional investors and retail investors. While both groups often move in sync, sometimes one group gets ahead of the other. In the recent market selloff, institutions were early sellers.

As retail investors started to trim position, institutions moved back in ahead of the market bounce higher. This could be seen more clearly with an increase in dark pool transactions.

These trades don’t show up on traditional exchange volume. But they suggest that someone expects a big move, but doesn’t want to tip off the market.

The end result? Smart money buys from retail investors as they sell, just in time for stock to rebound.

Markets are now back near the 200-day moving average, but below the 50-day moving average. This zone represents a classic “wall of worry.”

Stocks could still break lower from here, or retest the recent lows and move higher. On the plus side, stocks could also see a V-shaped recovery instead. Seasonality trends are now bullish for stocks into the summer. Starting in late summer, institutional investors will once again try to trap retail investors into losses.

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