Beware the Rise of the Dow Jones

Dow Jones Cash

Did you hear? Did you hear? The Dow Jones added 236 points on Monday. Oh, happy day. The S&P 500 gained 1.3%. The NASDAQ added 1.88%. Can’t you just feel the optimism? However there’s a good reason to still stick to cash during these times.

The problem – of course – is that Friday’s rout was quite a whirlwind. First, a 950-point drop by the Dow came after news broke about the Omicron variant emerging in South Africa and spreading to Europe and Australia. Now, investors pushed stocks back a tad after President Biden said that lockdowns wouldn’t be necessary… just yet. 

Here’s the thing. If you follow Haven Investment Letter, you know that there’s only one metric that I follow. Market momentum. And market momentum has been NEGATIVE since Nov. 18. That’s when I said cash is your friend. So, market momentum went negative a full week BEFORE this variant emerged. 

That means that something else is driving the market lower. Even after today’s small bounce, more than 62.5% of all publicly traded stocks are sitting under their 50-day moving averages. Investors have been leaving mid-, micro-, and nano-cap stocks in droves over the last month. 

Have a look at this chart over the last month from Finviz. 

Mega-cap stocks added 1.5% against on Monday as traders piled back into the big names like Microsoft (NASDAQ:MSFT), Adobe (NASDAQ:ADBE), and Apple (NASDAQ:AAPL). But remember, the mega-cap stocks only represent a smaller percentage of the stocks on the S&P 500. 

Despite those gains in the mega-cap space, momentum remains negative on the S&P 500. Any improvement in market momentum will require greater capital flows into the large-cap space at the bottom of that index.

But remember – The S&P 500 is NOT THE WHOLE market. That index represents just 500 of the total universe of roughly 8,300 stocks. 

The Russell 2000 – primarily comprised of small-cap stocks –  is back in the sideways levels that plagued that index for months in 2021. And even then, there are still thousands of companies that aren’t part of both of these indices. 

The nano-cap space is a very good place to watch if you’re trying to get a sense of broader market direction. But, unfortunately, these tiny stocks tend to attract speculative capital, and speculators have moved to the sideline right now. 

Remember – market momentum measures take the guesswork out of the market and let us rely on a very important position: Cash

Cash is a place I like to be during volatility. So if we see a selloff, and it will come eventually, cash will remain king. And as always, when market momentum goes back into positive territory, you will be among the first to know right here at Haven Investment Letter.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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