We’re going to assume that our readers already know the Valeant (NYSE:VRX) story, because even if we were qualified to retell it (and we aren’t), we sure as heck wouldn’t want to.
In fact, we really only have one really simple thing to tell you, and we’ve been waiting months to say it. So here it is, in bold italics.
Someone is finally buying the dip.
So, how do we know this? Take a look at this 1-year chart from our platform for a minute.
The blue squiggly line is what we’re interested in. It represents the ratio of buying volume to selling volume in dark pools. Dark pools are where investors go to quietly buy or sell shares without affecting prices on public exchanges.
For the past year, you’ll notice that the dark pool buy/sell ratio has been pretty steady. It’s never gone above 48%, and it averages around 33%. That means that for the past year, around 66% of volume in dark pools has been selling.
That’s why the trend has been so steadily down. And then down more. And more.
But something’s changed.
In the last few days, it’s easy to see that the ratio has shifted upward, and several days have even had net buying. Last Tuesday had 60% buying volume.
What does this really mean?
It might help to understand the effect of dark pool buying by simply looking at VRX’s history. Here’s a snapshot of a simpler time, before all this recent drama started.
You’ll notice that when there’s more buying in dark pools, it usually means that prices will rise in the future. In the simplest sense, it tells us when there is price support.
Are the dark pool buyers always right? Of course not, but in the chart above, it’s easy to see that net dark pool selling came alongside overvaluation or extreme uncertainty, and net dark pool buying was broadly a good thing.
Now return to today.
Looks promising, doesn’t it? But there’s another question.
Are we too early?
Sure. Maybe. Timing is hard. Even when we have lots of data on dark pool buying, timing is still hard. But that’s what trade sizing, options, and discipline are for.
See this chart? This is the Dark Index (DIX). It measures dark pool buying and selling across the entire S&P 500. Here’s the past two years (click here to see it yourself).
Much like the VRX chart, you’ll notice that high dark pool buying seems to tell us where there’s price support, but it can still take weeks or months for price to respond.
VRX might be the same way, but there’s probably still a trade here, just like there is when there’s dark pool buying in the broad market.
So, why is this happening now?
Recall that we don’t know anything about VRX except that some people started buying in earnest recently.
However, we can guess that the reason for the recent buying isn’t any particular news item, since the upswing in buying volume didn’t coincide with any “growthy” prospects or turnaround talk.
Instead, it seems most likely that recent price declines have triggered a particular variety of buyer who is interested in the value of underlying assets, despite growth prospects, guidance, or insufficient cash flow. Click here for a recent take on that opinion.
Do you agree? We really don’t care. Maybe these buyers are right, and maybe they’re wrong, but they’re still buying, and that’s good to know. Because, y’know, that’s why prices go up.
SqueezeMetrics is interested in talking about more stuff that matters and less stuff that doesn’t. Sound interesting? Leave a comment, and consider joining the conversation at Fresh Picks. Unless you’re a “committed short/long” with tapioca for brains. Then we’d rather you didn’t talk at all. Shoo.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VRX over 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.