DIX-GEX: A Freight Train Coming Through the Fog

Simultaneous selling by dark pools and significant changes in GEX have proven value in forecasting market down-turns in $SPX. (…more)

On Wednesday, November 27, the DIX put in a second day indicative of selling by off-exchange market participants.  Simultaneously, GEX hit an aberrant high of 8.22. This value was exceeded only twice within 2,157 data points (9/21/12 @ 8.99 and 11/15/13 @ 8.99).

I looked at the forecasting value of high GEX signals > 6 and, by themselves, the forecast potential was lacking. However, when I queried the database for GEX values greater than 7, the combination of low DIX and high GEX occurred eight times and appeared significant.

First, nearly all of the high GEX readings were linked to dark pools’ selling into rallies that were already long in the tooth. Second, all of the signals resulted in significant down-turns …about one month later.

Of the eight occurrences, some were redundant, leaving effectively four coincident signals …that is, four times when low DIX/high GEX forewarned of a relatively imminent and consequential correction.

Bottom line

The combination of low DIX and high GEX (>7)  appeared, on average, 35 days before a market decline of about 6%.

Implications

    • This analysis suggests we are seeing early signs of an ensuing correction in the equity markets.
    • Going forward, a watchful eye on dark pool selling and lookout for more negative changes in gamma exposure will be important.
    • While these coincident signals in DIX and GEX have been associated with an increase in volatility, they have previously provided adequate time to re-balance and hedge long equity positions.
    • While no market timing system works all of the time, investors who follow a quantitative model have been shown to outperform over long periods and reduce exposure to tail risk.