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Cathie Wood’s ARKK In The Gutter: Stay Away For Now

ARK Innovation keeps digging a deeper hole. Despite the sizable pullback from peak prices, I explain why now may be the wrong time to buy shares of Cathie Wood’s ETF on the dip.

You know when things look so bad that they can’t possibly get much worse? Cathie Wood and ARK Innovation ETF  (ARKK) - Get ARK Innovation ETF Report investors must be feeling this way. Yet, shares of the high-growth, high-valuation fund continue to tank: down a whopping 75% from the early 2021 peak.

As I type this paragraph, ARKK dips below $40 per share for the first time since the depths of the COVID-19 bear of March 2020. Despite the pandemic having helped ARK Innovation to skyrocket through 2021, the ETF is down 33% since the start of the 2020 COVID selloff.

Below, I review why ARKK continues to be in a funk. I then ask the question: should investors take advantage of this dip to buy “cheap shares”?

Figure 1: Cathie Wood’s ARKK In The Gutter: Stay Away For Now

Figure 1: Cathie Wood’s ARKK In The Gutter: Stay Away For Now

(Read more from Wall Street Memes: NIO Stock Below $14: Will This Decline Ever End?)

ARKK: problems on both sides

ARK Innovation has been taking hits from both sides. On the one hand, valuations continue to correct following a year or two of investor exuberance and risk-seeking behavior towards high-growth companies and stocks.

The stock market is clearly playing defense now, paying more attention to stability and cash flow firepower, as the chart below suggests. Notice how the tech- and growth-rich Nasdaq index (blue line) has dipped some 25% for the year so far. Meanwhile, consumer staples (green line) and utility (pink line) stocks have managed to stay above water.

Figure 2: Nasdaq, consumer staples and utility yeart-to-date performance.

Figure 2: Nasdaq, consumer staples and utility yeart-to-date performance.

But ARKK has not simply been a victim of valuation compression. Some of the top stocks that the ETF holds have been performing quite poorly lately.

Take Teladoc stock  (TDOC) - Get Teladoc Health Inc. Report as an example. This top 10 ARKK holding has been down 60% for the year alone! The company delivered pitiful Q1 results and guided lower for the rest of 2022, driven by unfavorable trends in the DTC mental health and chronic condition markets.

Roku stock  (ROKU) - Get Roku Inc. Report, ARKK’s third-largest holding, is another interesting case study. In Q1, the company “indicated user growth had decelerated sequentially, and it guided to the low side for second-quarter revenues”. Roku has been facing some of the same pressures felt by streaming peers like Netflix  (NFLX) - Get Netflix Inc. Report.

The investment thesis here seems to lean on a large addressable market — i.e., good long-term growth opportunities. However, as we exit the pandemic and return to “normal life”, the short-term prospects seem less than encouraging.

Don’t be a hero

It is quite impressive that a somewhat diversified ETF (35 stock holdings, none representing more than 10% of the total AUM) can be down as sharply as ARKK has been since early 2021 and year-to-date. For this reason, some investors might be tempted to buy this dip.

To them, I would offer my strong word of caution. I remember writing about ARKK in January, only a few months ago, and asking myself: “Was that the bottom for the ETF”? Down nearly 50% from the February 2021 peak, it could have seemed so for many investors.

Since then, ARK Innovation has dipped another 50%. Clearly, timing bottoms is hard, and the price that one pays for getting it wrong can be very steep.

Therefore, I reiterate my opinion on when to buy ARKK and when to stay away from it. In my view, price action should dictate the entries and exits. I believe that this is the best way to successfully trade a bubble, like ARK Innovation.

The chart below shows a buy-and-hold ARKK strategy as our benchmark (blue line). It then compares how a 50-day moving average strategy — i.e., own ARKK only if the share price is higher than the moving average — would have performed since the start of 2020.

Figure 3: ARKK buy-hold vs. moving average strategy.

Figure 3: ARKK buy-hold vs. moving average strategy.

The difference is immense: -9% per year for the benchmark buy-and-hold vs. +32% annualized for the moving average strategy. Even going back to the 2014 inception, the latter would have produced gains nearly twice as high as simply buying and holding the bubble.

Today, ARKK is a whopping $20 per share below its 50-day moving average. Therefore, those who choose to follow the strategy above should stay away from Cathie Wood’s flagship ETF for now — at least until investor sentiment and momentum turn favorable once again.

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(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)