From the Red Sea to a Sea of Red
What Happened
- For the first time, the Houthi Rebels claimed responsibility for a ballistic missile strike. The strike took place on Saturday targeted at southern Israel.
- The Nasdaq and Dow Jones enter correction territory, down 10% since its October highs, with the S&P 500 not far behind.
- Money Market Funds see massive inflows, with assets now at a record $7.86 TRILLION. This could have dangerous implications.
Why It Matters
- On Saturday the Houthis launched missiles to 11 different locations across southern Israel. It is unclear how many of these were intercepted by Israeli defenses but there is at least one death reported. As a result, we now have two major international oil chokepoints being gatekept by enemy regimes. Between Iran exercising its control over the Strait of Hormuz (SOH) and the Houthi Rebels now attempting to control the Bab al-Mandeb (BAM) panic in the region is skyrocketing. If both of these shipping lanes can be controlled by enemy forces then the entire artery that flows energy from the middle east to Europe is blocked.
- The Nasdaq hit its last all-time high of 26,182.10 on October 29, 2025. It has retreated to 23,132.77, a drop of 11.6%. Meanwhile, the Dow Jones entered correction territory as well, down 10% from its all-time highs. The S&P 500 is down 9% from its respective highs, also marking its fifth straight losing week on Friday. The average 401k balance on January 1, 2026, was $135,000. The recent route in major indices has wiped $9,000 from the average investor’s retirement account. Accounts more heavily weighted in equities or tech have seen even more blood fill their portfolio.
- Holding cash has become a go-to strategy for many investors. Money Market Funds (MMFs) have seen an 11% increase in assets YoY. This behavior is a textbook “flight to quality” move by investors who are hoping to lock in a guaranteed return on their money. The average MMF is posting an annual yield of 3.7%, which not only beats the Nasdaq by over 15%, but also beats inflation which currently stands at 2.7% YoY. Investors are demonstrating fear in the equities space by taking a surefire bet of 3.7% instead of risking capital losses from tech and AI which has been in a major bull market until recently. Preservation of capital has become the name of the game.
Let’s Dig Deeper
Many people had never even heard of the Strait of Hormuz (SOH) or the Bab al-Mandeb (BAM) until the last few weeks, we have. We are very familiar with the area, having deployed to that region and transited those straits multiple times. We want you to be aware of two things. First, although things are obviously escalated right now these straits have never been “peaceful”. The Houthis and IRGCN have always been a major intelligence briefing point before entering the waters and bad actors have always tried to push the limits of U.S. naval restraint. Second, despite the normal risks of the straits, we do face a significant problem. We discussed how the SOH is responsible for 20% of global oil trade. Well, the BAM is responsible for 12% of global trade (not just oil). The BAM sits south of the Suez Canal, which is a HUGE highway of international trade. See the map below if you are unfamiliar.
A ship CANNOT enter or exit the Suez Canal without transiting through the BAM. Yemen’s topography makes harassment in the BAM fairly simple. There are mountains that provide easy visibility to the majority of ships transiting through there. Remember, the Houthis don’t need to actually sink any ships to force shipping restrictions. They simply need to swarm the waters with suicide drones or sea mines, after a few direct hits, even ineffective hits, shipping companies will decide it isn’t worth the risk. The Houthis just attacked Israel in a major way, so we should understand that launching a few drones at civilian ships in the BAM is not out of the question. They proved their will to execute this strategy in 2024, and surely they are happy to resume attacks now that they have the geopolitical green light from their allies. The literal translation for Bab al-Mandeb is “Gate of Tears” and we expect that name to be put to the test in coming weeks.
2022 Called, it Wants its Bear Market Back
Both the Nasdaq and Dow Jones are officially in correction territory, being down more than 10% from their recent highs. The S&P 500 9% from its respective highs, just flirting with the sinister threshold. The major indices are routing, and we chose the word “routing” very carefully, because it means more than just the prices dropping. Whatever trading app or website you use, you aren’t actually trading through them. Apps like Robinhood, E-Trade, etc. don’t flow directly to the NYSE, they flow to Market Makers like Citadel, Virtu, etc. Smart money already began selling before a single missile flew from the Houthis to Israel. When a large quantity of block orders are submitted the Market Makers have an increasingly difficult time finding a willing buyer to willing seller. The bid to ask spread widens, causing even greater losses for investors, especially retail. How does this happen? Dark pools. Yes, it’s a real thing.
A dark pool doesn’t mean some secret clan of billionaires cheating their way through trading. Dark pools are a method of trading by institutions who have the ability to execute an order without any pre-trade transparency. In other words, if a major player sells on a dark pool, you won’t see the order populate on your app while its being processed, you will see it once it executes. Dark pool orders show up on the tape within minutes after execution. Off-exchange volume (dark pool volume) was roughly 45% of overall volume last week. From this we can clearly assume that smart money had already exited their positions before news broke that a missile was launched. Sophisticated algorithms have the ability to track breaking news and execute trades much faster than a journalist at the NYT can type an article. Is it fair? Perhaps not, but it’s the reality and we CAN take advantage of it. Take a look at the graphic below to see recent dark pool activity.
If a major index is down on the day, you can see whether or not those sell orders came from retail driven panic or institutional investors. A higher volume of institutional investors suggests the execution is methodical. Retail investors trade on emotion; institutions trade on logic and risk/reward calculations. 47% is exceedingly high when considering the average dark pool volume during normal operations hovers around 36%. Noticing this, we waited to buy the dip until the last half hour of trading on Friday. We will keep an eye on an institutional reversal of this trend. That said, markets still might drift lower from here.
While we didn’t get this information from them, we’d like to give a special shoutout to @UnusualWhales on X. If you want peak information on where the big dogs are putting their money we recommend giving them a follow.
Cash IS a Position
Many people forget, hoarding cash in uncertain market conditions is a strategy, and sometimes a pretty dang good one. Right now, MMFs are offering a 3.7% return, meanwhile the S&P 500 is down 7.1% YTD. $10,000 invested in MMF on January 1 in MMFs would be worth $10,092. That same amount invested into the top 500 most valuable companies in the world would be worth $9,290.
Historically speaking, extreme inflows to MMFs are a coincident indicator for a recession, and a leading indicator for recovery. Think of it like this:
It seems simple, but like most things in life it’s never as simple as it appears. We are not facing a “normal” money market cycle right now. Why? Iran. It’s true that stocks are down, it’s true that MMF inflows are surging, it’s true that the labor market is weakening, it’s true that we’re at war. You know what’s also true? Inflation is rising. The war in Iran is causing massive oil-related inflationary problems. Oil is the number one contributor to inflation and the Federal Reserve now has a lose-lose situation on their hands. Under normal circumstances they might start slashing rates, bringing down the yield that a MMF can offer, encouraging investors to take that dry powder and put it back into equities. However, it is extremely difficult for the Fed to justify slashing rates when we haven’t even seen the consequences from the oil crisis. We're stuck between the “flight to safety” and “capital rotates back to stocks” portion of the above graph with no way out, at least for now.
In Short
- The war in the middle east is escalating. The Houthi Rebels have joined the fight and directly attacked Israel with ballistic missiles. The Bab al-Mandeb strait is now being defended by an enemy regime in the same way the Strait of Hormuz is. The two major chokepoints for international trade are not off-limits to any unfriendly nation of Iran or Iranian proxies.
- Equities continue to suffer. The Nasdaq and Dow Jones are officially in correction territory, with the benchmark S&P 500 only 1% away from holding the same title. Institutional investors are rotating out of equities and leaving retail investors holding the bag.
- Money Market Funds have seen historic inflows recently. However, it’s impossible to tell if they have peaked. MMF inflows are a coincidental indicator of recession and a leading indicator of recovery, but we are not in a normal market cycle. The war in Iran has caused the Federal Reserve to pause while everything unfolds, bringing stagflation fears to the forefront of investor sentiment.
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Thanks for reading! Until next time, good luck and Godspeed.
Disclaimer:
The views and opinions expressed in The Pioneer Perspective are those of Daniel Harlow and Pioneer Financial, LLC and are provided for informational and educational purposes only. Nothing in this publication constitutes financial, investment, tax, or legal advice.
Market data and information are obtained from sources believed to be reliable, but their accuracy cannot be guaranteed. Past performance is not indicative of future results, and all investments involve risk, including the potential loss of principal.
Readers are encouraged to conduct their own research or consult a qualified financial professional before making any investment decisions.
References
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