Famed investor Cathie Wood’s ARK Innovation ETF (ARKK) - Get Free Report is finally showing signs of having a pulse. The high-growth strategy has had a terrible 2022 so far, down a whopping 58% since the start of the year. But the tides could be shifting, as ARKK has climbed 22% in the past four trading days alone.
Below, I explain why now is the time to buy ARKK and maybe ride the 290% rebound that would take the ETF back to all-time highs. Investors, however, should keep a couple of things in mind: (1) pay attention to price action and (2) know when to exit the trade.
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ARK Innovation: follow the trend
I have published about ARKK a few times in the past. To me, profiting from this ETF that has had intense ups and downs since its inception is much more a matter of following price trends than about company or sector fundamentals.
To be clear, any investor considering ARKK should fundamentally subscribe to Cathie Wood’s idea that high-impact, disruptive innovation probably offers the best potential returns over the long term, with valuation being all but a second thought. Die-hard disciples of Warren Buffett could stop reading right here.
If this minimum requirement is met, then I think that the next step is to ride the trend.
Unlike other investment strategies, ARKK’s approach can be very speculative and subject to bubble-like behavior: fast and sizable climbs to the stratosphere (think 2014-2020), followed by painful crashes (think 2021-present).
Simply holding ARKK when the previous day’s price was higher than the 50-day average price (but selling it whenever the ETF price dipped below the average) would have been a very profitable strategy over the past five years. See the chart below, which depicts:
- 50-day moving average strategy (since January 2018): total returns of 87%, maximum drop from a peak of 39%.
- Simple buy and hold (since January 2018): total returns of only 2%, maximum drop from a peak of 79%.
Of course, simply “trading the trend” would not have guaranteed a profit this year. Notice the orange line in the graph above: the strategy would have still lost money so far in 2022, 22% to be precise.
If trading ARKK, keep this in mind
For the first time since September 2022, ARKK price climbed enough to top its 50-day moving average on Thursday, November 11. If following the trend to a tee, which this strategy requires them to, traders should be invested in ARK Innovation right now. The ETF ended the Monday session worth nearly $40 per share vs. the $38.58 moving average.
But how do we know that this time ARKK will finally take off? Well, we don’t know it at all. This is why stepping out of the way before the ETF crashes again (if it happens) is a crucial part of the 50-day average approach.
I understand that fundamentalists (i.e., investors that use fundamentals to base their decisions) don’t usually appreciate the simplicity of just watching price action. To that, I would say that I am finally feeling a bit more optimistic about high-growth stocks once again. This is the first time in at least one year that the market has witnessed signs of cooling inflation and, possibly, less aggressive monetary tightening ahead.
But in the case of ARKK, I don’t even bother to look any deeper into ARKK’s top holdings, the prospects for growth stocks in 2023, or the state of the economy.
If ARKK ever returns to all-time highs of nearly $160 apiece, the upside opportunity of 290% is highly compelling. To partake in this recovery story, own the ETF at the right times and sell at the first sign of trouble to prevent large losses, only to repeat the process as many times as necessary to (hopefully) reap the benefits in the end.
ARK Innovation has finally shown signs of life, as the ETF price has finally climbed above its 50-day moving average for the first time since September 2022. Is this recovery the real deal?
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)