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MMM: Billion Dollar Trade
 
Thursday Aug 25, 2022

Context

Billion dollar trades are unusual when excluding the most heavily weighted components of the S&P. In a given week, AAPL will see roughly three $1B trades, MSFT will see two, and SPY will see one. AMZN will print one once every two weeks on average and TSLA about once a month. Outside those tickers, it's extremely rare to see a $1B trade. Most stocks will never see one that large and through August, only 37 stocks have seen one at any time in 2022.

I mention these stats to provide context for what happened next, and why trades of such unusual size can be among the strongest indications of institutional conviction.

That brings us to MMM. On August 25th, 2002, MMM printed a $1B trade at the close. It was the largest trade going back to at least 2014. Shortly after that print arrived, this tweet was sent to notify followers that an extremely rare and important trade had occurred and that was likely to result in a strong move. At the time thet tweet was sent, it was unclear which direction price was expected to move. But based on the prior day's action as outlined here and here, we knew our parameters and we could define our risk against the price level of the $1B trade (roughly $143).

We knew if price rallied, it would likely continue to do so. We knew if price broke below the price-levels of the trades from Aug 24th that a more bearish outcome was likely. We also knew that if price broke below that $140 support level, thus dropping below ALL of the very large trades from the prior 24 hour period, that it would be safe to assume that the $1B trade was an institutional sell and that bearish resolution was in progress.

But even before price had chosen a direction, and even before the market opened, we knew that the magnitude of the move resulting from a $1B trade was likely to be so large that even an ATM straddle would be an extremely low risk proposition with small to moderate upside. In other words, even if we don't have a strong sense of which direction the move will take, we know the magnitude of such a move will be high and thus we can play both sides.

The Opening Bell

Immediately after the open, price had popped from $143 to $144, initially suggesting bullish resolution. But there was no need to rush into a trade. Not only were we contending with algos during the opening minutes of RTH, we were operating on the backdrop of Powell's speech from Jackson Hole which was sure to induce volatility across all stocks. That speech was scheduled for 10am, so it was prudent to wait for that binary event to pass to get a better gauge on how price might continue.

Nearly an hour into the session, we had seen a sharp decline off the morning high when this tweet was sent. Because we knew exactly where institutions were positioned from the disproportionately large trades of the prior 24 hours, we knew that if price broke below those trades, bearish resolution was the more probable outcome.

And that's exactly what happened. Once price broke below $141 we had confirmation that every large trade from the prior 24 hours was either an institutional sell or was no longer in play. Institutions were not defending the $1B trade from $142.76 nor the $500M trade from $141. Once price broke below $141, this tweet was sent after it became reasonably probable that bearish resolution was in progress.

Trades of this size are opportunities, not risks. Disproportionatley large trades often yield disproportionately large moves. By late afternoon, price was falling fast and this tweet was sent. It was around this time that news was released regarding an unfavorable judgement in a lawsuit against MMM and selling accelerated.

Seasoned traders know that news doesn't move markets, it only speeds up the move that was already going to happen. We know this to be true because we saw institutions place a $1B trade nearly 24-hours before the news became public. As the old adage goes, someone always knows...

After the close, this tweet was sent to show a final look.

This trade yielded a 9% move in a single trading session. For those of you without twitter, here are the screenshots that were posted as this move unfolded...


Before

During

After
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