Innovation focused ARKK ETF had a great year in 2020 that outperformed the indices by a very wild margin. The chief investment officer Cathie Wood was hailed as the best fund manager of the year. 2021 was a very bad year for ARK funds and 2022 continues to be a very bad year as the macro conditions have turned against ARKK type of hyper growth stocks.
Cathie Wood took on the Wall Street by engaging the retail investors through social media. Never before there was a Wall Street professional like Cathie Wood shared the research materials so openly with the retail investors. Cathie Wood was embraced by the retail investors for her willingness to share and educate. Cathie was a big time bull for Tesla when the Wall Street thought Tesla was not investible (risk of bankruptcy) in earlier days. Tesla stock broke out a 5-year price range in December 2019 after the China factory went into production. Cathie Wood got the Tesla stock call right and became a hero for the Tesla cult followers which added a lot of credibility to attract more ARK funds inflows. Unfortunately, there is only one Elon Musk in the planet. Not every stock will have the same fate as TSLA. ARK funds are stuffed with hyper growth stocks that will NOT enjoy TSLA type of success. The stay-home crowds during pandemic supported by the pandemic fiscal and monetary polices partied with the ARK funds. ARKK ETF rose from 33 (the pandemic low) to 159.70 (momentum top in Feb. 2021), that is 384% increase. This type of rise is abnormal, unjust and not sustainable. When the tide turned, ARK funds are being punished with cruelty. This is how the market behaves that always goes to both directions in extreme.
So far the correction in ARKK ETF is very similar to the DOTCOM NASDAQ correction. The first swing down for the NASDAQ in March 2000 was 40%. The first swing down for ARKK from Feb. 21 to May 21 was 39%. Then both has a 7-8 weeks rally to retrace 50-61.8% of the down swing. The NASDAQ took 31 months from the March 2000 high to make the final bottom in October 2002. Will ARK funds take 31 months to bottom just like the NASDAQ did in 2002?
When we see 26 weeks momentum spikes in the overall industry group just like what ARK funds experienced in 2020, usually they have to correct for the better part of 24-36 months before a bottom is finally set in. If we apply this statistic to ARK funds, then it is likely that the final bottom of ARK funds has to be somewhere in 2023. When every seller of the ARK funds has gone, then it has a chance to repair the damages. Based on our price and time model, ARK funds could find the final bottom around April – August 2023 and the final low could be around the pandemic low.
What a roller coaster! A complete round trip in 3 years. This is the danger in momentum trading. When you are with momentum, everything is great. You can make many mistakes and still come out okay. When the momentum is against you, there is no place to hide.
ARK funds have rules that they can’t stay in cash, meaning they have to be invested all the time. Even if Cathie Wood knew Feb. 2021 momentum top is not sustainable, she still had to stay in all her positions, can’t cash out at the top. Cathie Wood can only preach her 5-year time horizon to keep people calm . This is one of the reasons that ARK funds will under perform index funds or smart individual investors. If ARK funds indeed make the final bottom in 2023, then ARK funds may not survive because the redemption may cause the funds to fold. We shall see.
In the short term, it looks like the ARKK could find a bottom around 63 because this 63 is the low of an equal swing. The ab swing from Feb-May 2021 gave this low target if we connect c to d.
At this 63 low, ARKK has corrected 60% peak to trough. Let’s hope the good earnings catch some of the fall.
We hold PLTR, WEJO, RBLX, MTTR and INMD. PLTR and WEJO are data growth stocks, RBLX and MTTR are metaverse growth stocks. INMD is a profitable and high growth cosmetic instrument company. These companies will perform in the next 4-year cycle which will start some time in 2023-2024. The remainder of the current 4-year (March 2020-2023/24) will not be kind to the growth stocks with higher rates and slower growth. So we would unload some of our positions in growth stocks in the next bounce. Or we could wait it out by selling covered calls.
For the remainder of the 4-year cycle (March 2020- 2023/24), we planned to hold TQQQ, SMH and XLE in addition to the long hold growth stocks.
We recently opened a small position in INTC. INTC lost two decades by hiring five wrong CEOs since the DOTCOM bust. INTC lost the mobile chip war to TSMC by not working with Apple. INTC lost grounds to AMD and NVDA because the five previous CEOs were finance guys. Now INTC hired an original INTC tech leader Pat Gelsinger. Could be Pat Gelsinger returning to INTC like Steve Jobs returning to Apple? The odds are greater than 50% in our view. Plus any tension with Taiwan could put INTC in the spot light. TSMC will lose and INTC will gain if there is anything happening with Taiwan. INTC should be a long hold for a turnaround story. INTC is at bare bone value, no fluff in the stock price.