Daily Note | Unlocked Notes

Future Sellers Update

Oct 11, 2022

Thomas Thornton

In 2021 I often wrote about the potential for “Future Sellers.” From mid-2020 through 2021, the amount of dollar inflows into the markets was extraordinary. There were more inflows in 2021 than in the last 20 years cumulatively. At the time, I called all of the inflows “future sellers.” Many new investors jumped into the markets late into the extreme index upside move. But it wasn’t just new retail it was just about every type of investor was on board with the Fed’s liquidity party.

At the end of 2021, I showed the high number of DeMark daily and weekly sell Countdowns combined with sentiment at highs. Yawn was the majority of responses. Not until late in December and early January did the sell side prime brokers, including Morgan Stanley and Goldman Sachs, highlight massive selling in mega-cap and tech from their hedge fund clients. It stood out, and I talked about what a big deal this was at the time for the markets. Hedge funds were selling exposure down at all-time highs.

The markets started to react to the high inflation levels, and equity markets continued to sell off with many bounces but today hit new lows. ARKK, the benchmark fund of excessive speculation, is now down 77% off the highs. That doesn’t stop Cathie Wood from speaking in front of audiences and on business TV. People still want to hear from her even though she changes the reasons her fund is down. She even wrote a letter to the Fed asking (or begging) them to stop yesterday. What is so crazy is that the retail investor has not capitulated. Some outflows, yet not enough in my experience, deem this strategy and fund DOA. The VWAP from the ARKK highs is about 60% higher than today’s price. People are still lugging this garbage in their accounts.

Going back to the hedge funds, this time is different. In some previous market crashes or bear markets, it’s typical to see overleveraged hedge funds blowing up every other day. There have been some closures, and there remain probably many that could close. Hedge fund net leverage (non-beta) peaked in November at 67%, and it’s now at 36%. This is the one percentile of exposure going back 10 years and three percentile since 2005. I have more on this below with some good data and what I expect to come next.

As mentioned on the Mid Morning note, many ETFs were bouncing above today’s VWAP levels that day traders love to see. Most are still above today’s VWAP levels (shown below). Risks remain as I laid out yesterday, despite many internal indicators and sentiment readings at extreme oversold levels. When I started buying some long trades in early September, I expressed my concerns that still remain, including earnings risks, the jobs data, tomorrow’s PPI, and this Thursday’s CPI. If we didn’t have these issues front and center, I would likely be more constructive. Binary events are like betting on black on a Roulette wheel. If you’re right, you win; if you are wrong, you lose. When I have less conviction, I will always size down to the smallest weight and hold a large cash position. A well-known hedge fund manager (who likes the Mets) often would wait until the data, either economic or earnings to be released to then make a better-informed decision. I am comfortable being patient, perhaps after some economic data and earnings risks are known. 2022 has been an opportunity-rich environment. This is the hard part of the cycle. Patience.


The cash percentage is at 48%. That’s a lot for me, and I’m cautious when it’s this high. I’ll be happy to move to net long or net short when the setup warrants. I am exiting BABA with a loss. The turn didn’t materialize, and I will revisit it again. It was a big win earlier this year, and with only a 2% sized position, it’s a nominal loss to step on the sidelines.


Here is a primer on the DeMark Setup and Sequential indicators.

S&P futures 60 minute

S&P 500 daily

The Nasdaq 100 futures 60 minute

NDX index daily

Future sellers still haven’t sold

This chart I showed back in 2021 illustrates the massive inflows I labeled future sellers.

This chart shows the drawdowns and duration of some previous bear markets. I believe this market will go at least 30% from the highs and last longer than most people will stay solvent.

Using DeMark Absolute Retracement from the highs in December has a downside 0.618 target of 2962. I’ve shown this as a worst-case scenario. If you think this is unlikely, it’s happened before.

From the highs in early 2020, I showed this and it came pretty close. A few other indexes, like the Dow, nailed it almost to the number.

In 2008 not only did the 0.618 level hit, but it nearly had a 0.382 retracement level get hit.

Here’s SPY

And QQQ, which is closer

HF exposure and why the vix won’t lift

MS showed this today, highlighting the weighted leverage is very low historically. Again this was at 67% back nearly a year ago, in November 2021. Where is the money going?

Charlie McElligott from Nomura explained why the VIX hasn’t had a blow-off top. Money has not gone into crash protection rather, hedge funds are sitting with high cash levels.

Bank of America was out today with their client flow data. Last week saw large inflows. This was also seen on the MS prime broker data, but hedge funds sold down exposure in the last few days.

Institutional clients and others were net buyers last week into large cap and sold small cap.

If I showed you this a year ago and said the market would be at 3500 and inflows have been persistent, you would say I was crazy. In 2008 flows dropped $50 billion, and in 2022 flows have increased by $50 billion. Will the retail capitulation see outflows with the future sellers?

Small cap outflows have dropped significantly, as you would expect.

tesla update – critical support at 200

Vix index UPDATE

Going back to what Charlie said earlier, the VIX hasn’t moved in relation to what one would expect with the markets hitting new year lows. The daily DeMark Sequential is on day 11 of 13 however it might be more important to look at the weekly if and when the future sellers all hit the sell button.

The weekly VIX has been contained between 20 and 35 in 2022. Again, if I told you last year that the S&P would be at 3600 and the VIX didn’t get over 40, you’d tell me I’m crazy. (Maybe I am??) Regardless the weekly chart is at an important junction. The DeMark Setup is on week 8 of 9 and could top with this signal next week or this could start a new weekly Sequential Countdown which we will know in the coming weeks. Furthermore, the DeMark Propulsion indicator is now qualified (if price stays here by the end of the week). The Propulsion worked on the downside back in mid-2020 when it was qualified with the solid red line, and the downside target came pretty close at 13.47. So if this continues, there are two targets: the Propulsion at 51.75 and/or the upside wave 5 potential price objective of 44.51. LASTLY, please do not buy one of the VIX ETFs to bet on this happening because the structure of the ETF has theta decay – meaning is decreases each day. If you don’t believe me, pull up a long-term chart of VXX or UVXY. These work better at extreme highs to sell short.


Factor monitor shows the most shorted baskets leading that have a lot of Russell value names in those baskets.

This is similar to the above monitor with various ETFs other indexes

This monitor has the S&P indexes and the Goldman Sachs most shorted baskets. I mixed day with this data. Some squeezing in consumer discretionary, HC, fins, REITs, Staples, and Utilities.

The PPO monitor (percentage price oscillator) force ranks ETF’s by percentage above/below the 50 day moving average. For information on this monitor please refer to this primer. This monitor is offered to Hedge Fund Telemetry subscribers who are on Bloomberg. The earlier note showed most ETFs in the red but above today’s VWAP levels. It was a good early sign of intraday demand.