-Written by Cole-
For those that have been following financial news in the past two years, Cathie Wood’s $ARKK should be
a familiar name. Dominating the headlines during COVID, in 2020 the ARKK fund – which invests in
“disruptive innovation” primarily in the tech and biotech space – returned a whopping 152% versus the
market gain of only around 17%. The actively managed fund invests in speculative, high growth
companies with sometimes unproven business models and little to no profitability – which as daunting
as it may sound, has come to seemingly embody the mindset of the modern investor. In the equities
market, revenues and free cash flow have taken a back seat to investor narrative – a narrative which has
been driven by the media and predominate trends across industries (like green energy, EVs, 5G, etc.).
Because the ARKK fund captures this narrative, and actively invests in these “disruptor” companies, I
believe it gives a unique insight to the mindset of the modern investor and ultimately where the market
will be driven to next. For full disclosure, I am not advocating for the investments in any of the
companies ARKK invests in – and for the previous years I have bet against it – but what I do believe is
that it could be useful for detecting market bottoms and tops; and that currently, we might be at a
potential market bottom.
Looking at the past performance and fundamentals of ARKK, it was almost obvious that a market top
was occurring. With its top holdings like Tesla ($TSLA) , Zoom ($ZM) , Roku ($ROKU), and Coinbase ($COIN) trading at ridiculous multiples all propped up on future growth prospects, it was only a matter of time before a correction happened. The explosive growth of the fund was undoubtedly unsustainable and it was no surprise that it then
crashed nearly 70% from its highs. From a technical analysis perspective it can be seen that right up to
the crash, despite there being any clear negative signs ahead, volume at its peak prices (between $140
and $145/share) began to reach extreme levels and can be clearly seen in the chart below:
This signal, along with the precautionary signals of the overall macro environment and the unsettling
valuations of the companies the fund was invested in should have warranted a clear signal that a market
top was imminent. Looking at the fund now, however, the opposite may be true.
I believe that right now we are a critical inflection point as we wait for the next market move, and that
whatever move is made next it will be significant (in either direction).
Compared to historical levels, it is clear that over the past month and at its current price there has been
a huge influx in volume meaning investors are piling into ARKK at record numbers. What this signifies to
me is that the bull market narrative might be what drives the market forward next. Couple this with the
fact that the overall macro environment might not be as bad as it seems, and an interesting picture
begins to develop.
What I see in the current environment is this:
- Uncertainty about an actual recession has caused the market to move sideways
- The Fed is continuing to raise rates to combat the 9% inflation we are seeing and no one knows
exactly when this will start to taper (but as soon as it does I expect to see a huge jump in tech
stocks) - Inflation has impacted consumer spending but these effects won’t/haven’t taken effect because
we are coming out of COVID where a buildup in demand has been created
With the fund’s companies trading at more reasonable multiples and having relatively upbeat earnings
despite the uncertain macro environment, this could be the signal of a market bottom with significant
upside ahead. In addition, as institutional investors are stockpiling cash at levels not seen in years, once
signals of strength develop, I believe that they will pour into the trend and drive serious momentum to
the upside.
Overall, despite the fund’s poor performance recently, I believe it is the best tracker of trends and hype
across the market and could be indicating a reversal. Previously investing in SPACs and Defi, the fund
was able to capitalize on what was popular and prevalent in the news at the time (regardless of how
sound the actual fundamentals of these companies it was investing in were). While many people
(including myself) might not fully believe in Cathie Wood and ARKK, it is hard to deny that they are able
to tap into the mindset of the modern retail investor – which has proven to be a powerful force.
Note: Before you make any investment decisions, please do your own DD.