quantwise 1.2.0 → 1.2.2

package/.claude/skills/institutional-flow-tracker/references/interpretation_framework.md

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+# Institutional Flow Interpretation Framework
+
+## Overview
+
+This framework provides a systematic approach to interpreting institutional ownership changes and converting 13F filing data into actionable investment signals. Use this as a decision tree for analyzing stocks discovered through institutional flow tracking.
+
+## Signal Quality Assessment Matrix
+
+### Dimension 1: Change Magnitude
+
+**Strong Change (High Signal Quality):**
+- Institutional ownership change: >15% QoQ
+- Number of institutions change: >10 net new or exited
+- Dollar value change: >$100M net flow
+- **Quality:** Unmistakable signal, warrants immediate attention
+
+**Moderate Change (Medium Signal Quality):**
+- Institutional ownership change: 5-15% QoQ
+- Number of institutions change: 3-10 net change
+- Dollar value change: $25M-$100M net flow
+- **Quality:** Meaningful signal, validate with other factors
+
+**Weak Change (Low Signal Quality):**
+- Institutional ownership change: <5% QoQ
+- Number of institutions change: <3 net change
+- Dollar value change: <$25M net flow
+- **Quality:** Noise, likely portfolio adjustments or rebalancing
+
+### Dimension 2: Consistency (Multi-Quarter Trend)
+
+**Sustained Trend (High Quality):**
+- 3+ quarters in same direction
+- Accelerating magnitude (Q1: +5%, Q2: +8%, Q3: +12%)
+- Consistent across market environments
+- **Quality:** High conviction signal
+
+**Emerging Trend (Medium Quality):**
+- 2 consecutive quarters in same direction
+- Stable magnitude
+- **Quality:** Developing signal, monitor next quarter
+
+**Single Quarter (Low Quality):**
+- Only 1 quarter of change
+- May reverse next quarter
+- **Quality:** Inconclusive, wait for confirmation
+
+**Inconsistent (No Signal):**
+- Flip-flopping between quarters
+- No clear direction
+- **Quality:** Noise, ignore
+
+### Dimension 3: Institution Quality Mix
+
+**High Quality Mix (Weight 3.0x):**
+- Dominated by Tier 1 superinvestors (Berkshire, Baupost, etc.)
+- Multiple quality value investors agreeing
+- Long-term oriented capital
+- **Interpretation:** Strong validation
+
+**Medium Quality Mix (Weight 2.0x):**
+- Mix of Tier 2 active mutual funds
+- Some quality participants
+- Mostly research-driven
+- **Interpretation:** Moderate validation
+
+**Low Quality Mix (Weight 0.5x):**
+- Dominated by passive index funds
+- Momentum/quant funds
+- Following price action
+- **Interpretation:** Weak validation, likely late to trend
+
+### Dimension 4: Concentration of Changes
+
+**Clustered Buying/Selling (High Quality):**
+- Multiple quality institutions moving same direction simultaneously
+- Coordinated timing (not literally, but similar conclusions)
+- High clustering score (>50 using framework from institutional_investor_types.md)
+- **Interpretation:** Independent research reaching same conclusion = high conviction
+
+**Scattered Activity (Medium Quality):**
+- Mix of buyers and sellers
+- No clear consensus
+- Clustering score 20-50
+- **Interpretation:** Divergent views, less clear signal
+
+**Single Institution (Low Quality):**
+- Only one significant mover
+- Others flat or opposite
+- Clustering score <20
+- **Interpretation:** Idiosyncratic, institution-specific reason
+
+## Comprehensive Signal Interpretation Framework
+
+### Level 1: Strong Buy Signal (95th percentile)
+
+**Criteria (ALL must be met):**
+1. **Magnitude:** Institutional ownership increasing >15% QoQ
+2. **Consistency:** 3+ consecutive quarters of accumulation
+3. **Quality:** Clustering score >60 (multiple Tier 1/2 investors buying)
+4. **Concentration:** Rising institutional concentration (top 10 holders increasing %)
+5. **Type:** Quality investors adding, not just index funds
+6. **Fundamental Support:** Revenue/earnings growth positive
+7. **Price Action:** Stock underperformed or neutral (not already up 50%+)
+
+**Interpretation:**
+- Smart money accumulating before broader market recognition
+- High probability of significant price appreciation in next 1-4 quarters
+- Likely catalysts being anticipated by institutions
+
+**Action:**
+- **New position:** BUY with conviction (2-5% portfolio position)
+- **Existing position:** ADD to position
+- **Risk management:** Normal position sizing, standard stop-loss
+
+**Historical Success Rate:** ~75-80% positive returns over 12 months
+
+**Example Pattern:**
+```
+Stock XYZ - Sustained Quality Accumulation
+
+Q1 2024:
+- Institutional ownership: 45% → 50% (+5%)
+- New holders: Baupost Group (Tier 1)
+- Clustering score: 35
+
+Q2 2024:
+- Institutional ownership: 50% → 58% (+8%)
+- Increasers: Berkshire (+20%), Fidelity (+15%), Dodge & Cox (+10%)
+- Clustering score: 55
+
+Q3 2024:
+- Institutional ownership: 58% → 68% (+10%)
+- Increasers: Berkshire (+10% more), Baupost (+25%), T. Rowe Price (new position)
+- Clustering score: 72
+
+Stock price during period: $45 → $48 (+6.7%)
+Revenue growth: +12% YoY
+P/E: 18x (sector average: 22x)
+
+Signal: STRONG BUY
+Interpretation: Quality value investors seeing opportunity before market, sustained accumulation
+Expected outcome: Stock re-rating to sector average P/E = $48 × (22/18) = $58.67 (+22% upside)
+```
+
+### Level 2: Moderate Buy Signal (75th percentile)
+
+**Criteria (Most must be met):**
+1. **Magnitude:** Institutional ownership increasing 7-15% QoQ
+2. **Consistency:** 2 consecutive quarters of accumulation
+3. **Quality:** Clustering score 40-60 (mix of Tier 1/2 investors)
+4. **Type:** More quality buyers than sellers
+5. **Fundamental Support:** At least stable fundamentals
+6. **Price Action:** Not extended (not up >30% in past quarter)
+
+**Interpretation:**
+- Institutions building positions
+- Positive outlook but not unanimously bullish
+- Moderate probability of price appreciation
+
+**Action:**
+- **New position:** BUY with moderate conviction (1-3% portfolio position)
+- **Existing position:** HOLD or small ADD
+- **Risk management:** Tighter stop-loss, monitor quarterly
+
+**Historical Success Rate:** ~60-65% positive returns over 12 months
+
+### Level 3: Neutral/Hold Signal (50th percentile)
+
+**Criteria:**
+1. **Magnitude:** Institutional ownership change <5% QoQ
+2. **Consistency:** No clear trend
+3. **Quality:** Mixed clustering score (20-40)
+4. **Type:** Similar number of buyers and sellers
+
+**Interpretation:**
+- No clear institutional consensus
+- Status quo
+- Let other factors drive decision
+
+**Action:**
+- **New position:** PASS (wait for clearer signal)
+- **Existing position:** HOLD (no change)
+- **Risk management:** Standard position sizing
+
+**Historical Success Rate:** ~50% (random walk)
+
+### Level 4: Moderate Sell Signal (25th percentile)
+
+**Criteria (Most must be met):**
+1. **Magnitude:** Institutional ownership decreasing 7-15% QoQ
+2. **Consistency:** 2 consecutive quarters of distribution
+3. **Quality:** Tier 1/2 investors reducing positions
+4. **Type:** More quality sellers than buyers
+5. **Price Action:** Stock may still be rising (distribution into strength)
+
+**Interpretation:**
+- Smart money reducing exposure
+- Early warning sign
+- Potential deterioration in fundamentals or valuation concerns
+
+**Action:**
+- **New position:** AVOID
+- **Existing position:** TRIM or SELL (reduce to 50% of normal position size)
+- **Risk management:** Tighten stop-loss, prepare to exit
+
+**Historical Success Rate:** ~60-65% underperform market over 12 months
+
+### Level 5: Strong Sell Signal (5th percentile)
+
+**Criteria (ALL must be met):**
+1. **Magnitude:** Institutional ownership decreasing >15% QoQ
+2. **Consistency:** 3+ consecutive quarters of distribution
+3. **Quality:** Clustering score >60 on SELL side (multiple Tier 1/2 investors exiting)
+4. **Concentration:** Declining institutional concentration (top holders exiting)
+5. **Type:** Quality investors exiting, only passive/momentum funds remaining
+6. **Price Action:** May still be positive (smart money exits before crash)
+
+**Interpretation:**
+- Widespread institutional exodus
+- Serious fundamental concerns (even if not yet visible)
+- High probability of significant decline
+- Institutional investors know something market doesn't
+
+**Action:**
+- **New position:** DO NOT BUY (even if stock looks cheap)
+- **Existing position:** SELL immediately (full exit)
+- **Short consideration:** Consider short if technical setup supports
+
+**Historical Success Rate:** ~75-80% negative returns over 12 months
+
+**Example Pattern:**
+```
+Stock ABC - Sustained Quality Distribution
+
+Q1 2024:
+- Institutional ownership: 72% → 68% (-4%)
+- Exits: Small hedge fund
+- Clustering score: -15
+
+Q2 2024:
+- Institutional ownership: 68% → 60% (-8%)
+- Decreasers: Fidelity (-20%), Wellington (-15%)
+- Exits: 2 more funds
+- Clustering score: -42
+
+Q3 2024:
+- Institutional ownership: 60% → 48% (-12%)
+- Decreasers: Berkshire (-30%), Dodge & Cox (-25%), T. Rowe Price (-20%)
+- Exits: 5 quality funds
+- Clustering score: -85
+
+Stock price during period: $80 → $75 (-6.25%)
+Revenue growth: Slowing from +20% to +8% YoY
+Management: Guiding lower for next quarter (not yet public in Q2)
+
+Signal: STRONG SELL
+Interpretation: Quality investors exiting ahead of visible deterioration
+Expected outcome: Stock decline to $50-60 range as problems become apparent (-25% to -40%)
+Actual outcome (next 2 quarters): Stock fell to $52 (-35% from Q3 peak)
+```
+
+## Contextual Adjustments
+
+### Adjustment 1: Market Cap Considerations
+
+**Large Cap (>$10B):**
+- Harder for institutions to accumulate without moving price
+- Sustained accumulation = very strong signal
+- Distribution easier to hide
+- **Adjustment:** Increase signal strength for accumulation (+0.5 levels)
+
+**Mid Cap ($2B-$10B):**
+- Sweet spot for institutional accumulation
+- Standard signal strength
+- **Adjustment:** No adjustment (baseline)
+
+**Small Cap ($300M-$2B):**
+- Can be moved easily by single institution
+- Need broader participation for strong signal
+- **Adjustment:** Require higher clustering score (+10 points)
+
+**Micro Cap (<$300M):**
+- Limited institutional interest
+- 13F data less relevant
+- **Adjustment:** De-weight institutional signals (-0.5 levels)
+
+### Adjustment 2: Current Valuation
+
+**Undervalued (P/E <15, P/B <2, FCF Yield >8%):**
+- Institutional accumulation = value investors seeing opportunity
+- Higher probability of success
+- **Adjustment:** +0.5 signal strength
+
+**Fairly Valued (P/E 15-25, typical metrics):**
+- Standard interpretation
+- **Adjustment:** No adjustment
+
+**Overvalued (P/E >30, P/B >5, FCF Yield <3%):**
+- Institutional accumulation may be late-stage momentum
+- Distribution more significant (quality investors taking profits)
+- **Adjustment:** -0.5 signal strength for accumulation, +0.5 for distribution
+
+### Adjustment 3: Sector/Industry Dynamics
+
+**Secular Growth Sector (Tech, Healthcare Innovation):**
+- Institutional accumulation normal
+- Need higher magnitude for strong signal
+- **Adjustment:** Require +5% higher ownership change
+
+**Cyclical Sector (Industrials, Materials, Energy):**
+- Pay attention to economic cycle
+- Early cycle accumulation = strong signal
+- Late cycle distribution = strong signal
+- **Adjustment:** Context-dependent, weight by macro environment
+
+**Defensive Sector (Utilities, Consumer Staples, REITs):**
+- Lower growth, stable ownership
+- Large changes more meaningful
+- **Adjustment:** Lower thresholds (-3% ownership change)
+
+### Adjustment 4: Recent Price Action
+
+**Stock Down >20% in past quarter:**
+- Institutional accumulation = contrarian buying (value opportunity)
+- **Interpretation:** Very strong signal if quality investors
+- **Adjustment:** +1.0 signal strength
+
+**Stock Flat to +10%:**
+- Standard interpretation
+- **Adjustment:** No adjustment
+
+**Stock Up >30% in past quarter:**
+- Institutional accumulation may be chasing momentum (late)
+- Distribution less meaningful (profit-taking)
+- **Adjustment:** -0.5 signal strength for accumulation
+
+**Stock Up >100% in past year:**
+- Institutional distribution = smart money taking profits (very significant)
+- New accumulation suspect (likely late-stage momentum)
+- **Adjustment:** +1.0 signal strength for distribution, -1.0 for accumulation
+
+## Multi-Factor Integration
+
+### Combining Institutional Flow with Other Signals
+
+**Institutional Flow + Fundamental Analysis:**
+
+| Institutional Signal | Fundamental Signal | Combined Interpretation | Action |
+|---------------------|-------------------|------------------------|---------|
+| Strong Buy | Strong Buy | Very High Conviction | BUY LARGE (5%+ position) |
+| Strong Buy | Neutral | High Conviction | BUY (3-5% position) |
+| Strong Buy | Weak | Contrarian Value | BUY SMALL (1-2%, monitor) |
+| Moderate Buy | Strong Buy | High Conviction | BUY (3-5% position) |
+| Moderate Buy | Neutral | Moderate Conviction | BUY SMALL (1-3% position) |
+| Neutral | Strong Buy | Fundamental-Driven | BUY (2-4% position) |
+| Moderate Sell | Strong Buy | Investigate Divergence | HOLD (research further) |
+| Strong Sell | Strong Buy | **Major Red Flag** | AVOID (institutions know something) |
+| Strong Sell | Weak | Confirmed Decline | SELL or SHORT |
+
+**Institutional Flow + Technical Analysis:**
+
+| Institutional Signal | Technical Signal | Combined Interpretation | Action |
+|---------------------|------------------|------------------------|---------|
+| Strong Buy | Breakout | Confirmed Uptrend | BUY on breakout |
+| Strong Buy | Basing | Accumulation Before Move | BUY in base, add on breakout |
+| Strong Buy | Downtrend | Early/Contrarian | WAIT for technical confirmation |
+| Moderate Buy | Breakout | Confirming Move | BUY on pullback to breakout level |
+| Neutral | Breakout | Technically Driven | TRADE (not invest) |
+| Moderate Sell | Breakdown | Confirmed Downtrend | SELL |
+| Strong Sell | Breakdown | Accelerating Decline | SELL IMMEDIATELY |
+
+**Institutional Flow + Insider Trading:**
+
+| Institutional Signal | Insider Signal | Combined Interpretation | Action |
+|---------------------|----------------|------------------------|---------|
+| Strong Buy | Insider Buying | **Maximum Conviction** | BUY LARGE |
+| Strong Buy | Neutral | Strong Signal | BUY |
+| Strong Buy | Insider Selling | Investigate Discrepancy | BUY SMALL (monitor) |
+| Neutral | Insider Buying | Insider Conviction | BUY MODERATE |
+| Moderate Sell | Insider Buying | **Conflicting Signals** | HOLD (investigate) |
+| Moderate Sell | Insider Selling | Confirming Distribution | SELL |
+| Strong Sell | Insider Selling | **Maximum Conviction SELL** | EXIT IMMEDIATELY |
+
+## Sector Rotation Framework
+
+### Using Institutional Flow to Identify Sector Rotation
+
+**Step 1: Calculate Aggregate Sector-Level Institutional Flow**
+
+For each sector (Technology, Healthcare, Financials, etc.):
+```
+Sector Institutional Flow Score =
+  Sum of (Stock Institutional Ownership Change × Market Cap) for all stocks in sector
+  / Total Sector Market Cap
+
+Positive score = Net institutional inflow to sector
+Negative score = Net institutional outflow from sector
+```
+
+**Step 2: Rank Sectors by Flow Score**
+
+```
+Top 3 sectors (highest positive flow) = Accumulation sectors
+Middle sectors = Neutral
+Bottom 3 sectors (most negative flow) = Distribution sectors
+```
+
+**Step 3: Interpret by Market Cycle**
+
+**Early Cycle (Post-Recession Recovery):**
+- **Expect Accumulation:** Technology, Consumer Discretionary, Financials
+- **Expect Distribution:** Utilities, Consumer Staples, Healthcare
+- **Signal:** If institutional flow matches expectations = confirmation
+- **Signal:** If institutional flow opposes expectations = investigate (possible false recovery or delayed cycle)
+
+**Mid Cycle (Economic Expansion):**
+- **Expect Accumulation:** Industrials, Materials, Energy
+- **Expect Distribution:** Defensive sectors
+- **Signal:** Rotation into cyclicals confirms expansion
+
+**Late Cycle (Peak Growth):**
+- **Expect Accumulation:** Energy, Materials (inflation protection)
+- **Expect Distribution:** Technology, Consumer Discretionary (profit-taking)
+- **Signal:** Rotation to inflation hedges signals late cycle
+
+**Recession:**
+- **Expect Accumulation:** Utilities, Consumer Staples, Healthcare
+- **Expect Distribution:** Cyclicals, Growth stocks
+- **Signal:** Flight to safety
+
+**Step 4: Portfolio Allocation Based on Sector Flow**
+
+```
+High Institutional Inflow Sectors:
+- Overweight (30-40% of equity allocation)
+- Select best stocks within sector using institutional flow
+
+Neutral Sectors:
+- Market weight (10-20% of equity allocation)
+
+High Institutional Outflow Sectors:
+- Underweight or zero weight (0-10% of equity allocation)
+- Sell existing positions showing institutional distribution
+```
+
+## Practical Decision Tree
+
+### For New Position Consideration:
+
+```
+1. Run institutional flow analysis on stock
+   ↓
+2. What is the signal level?
+   ↓
+   ├─ Strong Buy Signal (Level 1)
+   │  ├─ Check fundamentals: Strong → BUY LARGE (5%+)
+   │  ├─ Check fundamentals: Neutral → BUY (3-5%)
+   │  └─ Check fundamentals: Weak → BUY SMALL (1-2%), monitor
+   │
+   ├─ Moderate Buy Signal (Level 2)
+   │  ├─ Check fundamentals: Strong → BUY (3-5%)
+   │  ├─ Check fundamentals: Neutral → BUY SMALL (1-3%)
+   │  └─ Check fundamentals: Weak → PASS
+   │
+   ├─ Neutral (Level 3)
+   │  └─ Decide based on other factors (fundamental, technical)
+   │
+   ├─ Moderate Sell Signal (Level 4)
+   │  └─ AVOID (do not initiate)
+   │
+   └─ Strong Sell Signal (Level 5)
+      └─ AVOID or SHORT (if appropriate)
+```
+
+### For Existing Position Review:
+
+```
+1. Run quarterly institutional flow analysis
+   ↓
+2. What is the signal level?
+   ↓
+   ├─ Strong Buy Signal (Level 1)
+   │  └─ ADD to position (up to maximum 10% portfolio weight)
+   │
+   ├─ Moderate Buy Signal (Level 2)
+   │  └─ HOLD or small ADD
+   │
+   ├─ Neutral (Level 3)
+   │  └─ HOLD (no change)
+   │
+   ├─ Moderate Sell Signal (Level 4)
+   │  ├─ Check fundamentals: Deteriorating → TRIM to 50% or SELL
+   │  ├─ Check fundamentals: Stable → TRIM to 75%
+   │  └─ Check fundamentals: Strong → HOLD (monitor closely)
+   │
+   └─ Strong Sell Signal (Level 5)
+      └─ SELL immediately (full exit)
+```
+
+## Common Mistakes to Avoid
+
+### Mistake 1: Overreacting to Single Quarter
+
+**Problem:** One quarter of institutional buying/selling may not be a trend
+
+**Solution:**
+- Require 2+ quarters for moderate signals
+- Require 3+ quarters for strong conviction
+- View single quarter as hypothesis, not confirmation
+
+### Mistake 2: Ignoring Index Fund Flows
+
+**Problem:** Treating passive inflows like active accumulation
+
+**Solution:**
+- Separate active from passive using institutional tiers
+- Weight Tier 1/2 heavily, Tier 4 (index funds) minimally
+- Focus on WHO is buying, not just THAT institutions are buying
+
+### Mistake 3: Following Too Late
+
+**Problem:** Institutional buying visible in 13F after 45-day lag; stock may have already moved
+
+**Solution:**
+- Use 13F as confirming signal, not entry trigger
+- Combine with technical analysis for timing
+- Be willing to buy after initial move if institutional thesis strong
+
+### Mistake 4: Ignoring Price Action Context
+
+**Problem:** Institutional buying in falling stock (catching falling knife) vs rising stock (momentum)
+
+**Solution:**
+- Institutional accumulation + falling price = potential value opportunity (higher conviction)
+- Institutional accumulation + rising price = momentum (lower conviction, may be late)
+- Adjust signal strength based on recent price action
+
+### Mistake 5: Equal Weighting All Institutions
+
+**Problem:** Treating index fund flows same as Berkshire Hathaway
+
+**Solution:**
+- Use institutional tier weighting framework
+- Tier 1 (Superinvestors): 3.0-3.5x weight
+- Tier 2 (Quality Active): 2.0-2.5x weight
+- Tier 3 (Average): 1.0-1.5x weight
+- Tier 4 (Passive): 0.0-0.5x weight
+
+## Summary Checklist
+
+Before making investment decision based on institutional flow:
+
+**✅ Verification Checklist:**
+- [ ] Signal level determined (Strong/Moderate/Neutral Buy or Sell)
+- [ ] Multi-quarter trend confirmed (2+ quarters same direction)
+- [ ] Institution quality assessed (Tier 1/2 involvement?)
+- [ ] Clustering score calculated (>50 for strong signals)
+- [ ] Market cap context considered (adjustment needed?)
+- [ ] Valuation context considered (adjustment needed?)
+- [ ] Recent price action reviewed (adjustment needed?)
+- [ ] Fundamental analysis completed (aligns with institutional thesis?)
+- [ ] Technical analysis reviewed (entry timing optimized?)
+- [ ] Position sizing determined based on signal strength
+- [ ] Risk management plan established (stop-loss, monitoring frequency)
+
+**Final Decision Framework:**
+- **5+ yes = High Conviction:** BUY/SELL with conviction
+- **3-4 yes = Moderate Conviction:** HOLD or Small BUY/TRIM
+- **<3 yes = Low Conviction:** PASS or minimal position
+
+---
+
+This interpretation framework should be used as a systematic guide, not rigid rules. Market conditions, individual stock characteristics, and portfolio constraints should also inform final decisions. Institutional flow is a powerful signal but works best when combined with fundamental and technical analysis.