I have seen some posts about Squeeze Metrics' DIX/GEX on here and I had no clue what I was reading about. It seemed promising so I decided to dive in to the white paper. Given that these metrics are pretty esoteric and tough to understand, I tried my best to condense the info for everyone. Some of this was quoted directly from the white paper and Squeeze Metrics posts on Seeking Alpha.

TL;DR
High DIX (45% ), Lots of buying - Low DIX, Low Buying.
Low GEX (0 and below), High Volatility - High GEX, Low Volatility

SHORT SELLING

OK, first thing you need to do is change your understanding of short selling. Short selling volume is usually associated with speculation, but according to the SEC, 49% of selling volume is short selling. No one really believes that 49% of selling volume is speculative shorts, so we need an explanation as to why this number is so high.

Bring in the Market Makers. MMs make their money by quoting a spread. This means placing a bid at, say, $19.95, and an offer at $20.00. Since the MMs have no position in the stock, the offer at $20.00 is necessarily entered as a short sale―they don't own it, so they can't actually sell it. This is why short volume is so high. When an investor buys shares from a MM, the MM initiates a short in order to facilitate the sale.

Back in 1997, when the U.S. market's tightest spread was 12.5 cents, the Island ECN (an off-exchange trading venue for NASDAQ stocks) started doing something different: They paid market-makers to do what market-makers already do―quote a spread. Whenever a trader “took” the liquidity that the MM posted at the bid or offer, that trader would pay a small fee, and most of that fee would be given, as a “rebate,” to the MM. Essentially, MMs make money through rebates for providing liquidity. The high frequency trading we see today is essentially a mad dash to provide liquidity and accrue money through rebates. So, when you buy and sell shares of a stock, you are for certain buying those shares from a market maker trying to make money through liquidity rebates.

Why this matters for us: The competition to provide liquidity guarantees that the vast majority of market orders go through MMs, because with spreads at a penny or less, they can't afford to let anyone else collect those rebates. Thanks to this state of affairs, there is a middle-man for just about every order that is executed on the market. Lucky for us, this middle-man always leaves a trail―he is compelled to sell short whenever he fills a buy order. This struggle to collect a liquidity rebate, culminating in aggressive HFT market-making, is why short volume has become such a strong indicator of buying activity. So, yes, this is counter-intuitive, but makes sense given the way the market functions.

The Dark Index (DPI) (DIX)

Next, you need a basic understanding of dark pools. Ever since 2010, FINRA has collected short sale volume data from their Trade Reporting Facilities (TRFs).The TRFs receive data from exclusively off-exchange, or “dark,” venues. Some of these venues are Alternative Trading Systems (ATSs), or “dark pools” and some are “internalizers.” Since the analysis doesn't need to distinguish between types of off-exchange venues, all data from the TRFs can be described as “dark pool” data. The only thing "dark" about dark pools is that there is no pre-trade data. No order book or quoting. Dark pools also have MMs that do the same thing in lit exchanges - they buy what is sold to them and short sell what is bought from them.

So, essentially what we are learning here is that "short" really means "long". The theory is that short selling is a proxy for buying pressure. The more short selling you see, the more buy orders are being filled by MMs. There are charts in the white paper showing short selling volume and intraday returns that should make you very interested. High short volume above 35% is associated with positive intraday returns.

Short volume above ~35% is correlated with positive intra-day returns

Now armed with this general outline of how the market works and dark pools, we can extrapolate the dark pool index (DIX). The analysis shows there is longer term predictive value in short volume data when aggregated. The DIX shows dollar weighted dark pool short volume across all components of the S&P. Since it is dollar weighted, more value is given to larger and more frequently traded stocks. High DIX (greater than or equal to 45%) is associated with mean 60-day market returns of 5.3%. Higher DIX, higher returns.

DIX and 60-day mean future market returns

Right now we see 51.2% on the DIX as of EOD on May 22nd. From the scatter plot in the white paper this is associated with even higher 60-day mean returns. This is the 2nd highest DIX reading since Squeeze Metrics started compiling data in 2011.

Gamma Exposure (GEX)

The GEX is much easier to comprehend. GEX measures the positions of option MMs and exactly how much they'll have to buy or sell in order to hedge their books. If GEX is positive, MMs have to buy that amount when stock prices fall and sell when stock prices rise. If GEX is negative, MMs have to buy that amount of stock into rising prices and sell that amount of stock into falling prices. So, in short, negative GEX numbers create volatility while positive GEX numbers inhibit volatility.

GEX value and market movement

As you can see, when GEX hits 0 and below, the market gains and losses fan out like crazy. The higher the GEX, the smaller the movement.

What Have We Learned? Practical Applications

The DIX/GEX is extremely valuable information when understood. It can help you predict if the market is going to move up or down and by how much.

High DIX means that MMs are short selling in order to provide liquidity to buyers in the market. The higher the DIX, the higher the bullishness of the dark pools.
The lower the GEX, the more volatility there is in the market. The GEX reading can give you an idea of how much the market will move going forward.

My understanding is if you see a high DIX and a very low GEX, you may want to buy OTM SPY calls. If you see a low DIX and very low GEX, buy OTM SPY puts. If you see high GEX in general, buy ATM puts and calls depending on the DIX level. If you want to ignore this and show off loss porn, do that too. At the end of the day, I just learned all this stuff myself and will be keeping an eye on it as the market moves.