Skip to main content

Cathie Wood’s ARK Innovation: Get Ready To Buy And Ride The Recovery

ARK Innovation sank 57% from the peak, but is now showing signs of recovery. Here is when investors might consider buying the dip and riding the rebound.

As I type this sentence, Cathie Wood’s ARK Innovation ETF  (ARKK) - Get Free Report is up a whopping 8% for the day. The strong rally follows a Friday session in which the fund gained 4% to bounce off an 18-month low of $66.33 per share.

Consistent with my mid-January views on when to buy the dip in ARKK, I believe that Cathie Wood’s flagship ETF may start to look like an interesting bet for the long run very soon. Today, I will explain why.

Figure 1: Cathie Wood’s ARK Innovation: Get Ready To Buy And Ride The Recovery

Figure 1: Cathie Wood’s ARK Innovation: Get Ready To Buy And Ride The Recovery

(Read more from Wall Street Memes: Most Anticipated Earnings This Week: AMD, GOOGL, FB, AMZN)

Why buying ARKK can be tricky

From a business perspective, it is not hard to make an argument in favor of high growth stocks of leading tech companies in industries ripe for disruption — precisely the types of stocks that ARKK invests in.

Urban transportation is undergoing a massive transition to electric and autonomous vehicles, with Tesla  (TSLA) - Get Free Report leading the charge so far. Office productivity and even healthcare services will never be the same in a post-pandemic environment, with the likes of Zoom  (ZM) - Get Free Report and Teladoc  (TDOC) - Get Free Report likely benefiting the most.

So, why not invest in an ETF like ARKK after its price has declined as much as 57% from the historical highs reached in February 2021? Because the formation and bursting of market bubbles can trick investors into buying dips too early, exposing them to massive losses.

This is what happened during the dot-com crisis. I explained it in a Seeking Alpha article:

“The Nasdaq peaked in March 2000, after having climbed a cumulative 500% in the previous five years (for reference, ARKK spiked 880% in the five years leading to February 2021). By December 2000, the index had already lost 50% of its value from the peak. [...] The problem for bold investors who bought the dip at that point is that the Nasdaq did not stop unwinding. In the following two years, the tech group shed another 28% and 38% of its value in 2001 and 2002, respectively. The index did not break through its December 2000 levels, never to dip below it again until December 2011 — that's 11 years later!”

Get ready to buy ARKK

This is why, in my opinion, it is a bad idea to buy the dip in ARKK now and just hope for the best. Rather, I explained how using a simple moving average strategy can help investors avoid the bearish momentum and ride positive sentiment during these boom-and-bust cycles.

The chart below shows the performance of a strategy in which ARKK is owned only when its price is above the 50-day moving average; and sold whenever the ETF dips below the trending line. Doing so would have produced 45% in annualized returns since the start of 2020 vs. 22% for buy-and-hold, while the drawdowns would have been substantially less damaging.

Figure 2: ARKK: buy-hold vs. moving average strategy.

Figure 2: ARKK: buy-hold vs. moving average strategy.

Currently, ARKK trades at around $74 per share. The 50-day moving average has been declining fast, and currently sits at about $91. Should the recent recovery continue and not prove to be the result of mere bear market volatility, ARKK will likely cross the moving average at around $85, at which point I think that buying the ETF might make sense.

Twitter speaks

When do you believe is the best time to buy the dip in Cathie Wood’s ARK Innovation ETF?

(Read more from Wall Street Memes: Why Did Robinhood Stock Fall and Then Recover?)

(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 Wall Street Memes)