The Bottom Falls Out of ARK

Over a month ago, I uncovered a sunny thesis about a bottom for the ARK funds. The timing of that post happened to be the exact top of the cycle for the ARK funds. Moreover, the S&P 500 (SPY) was trading just under its 200-day moving average (DMA) (the blue in the chart below). Once the index failed to break through that resistance and then the stock market dropped out of overbought territory, I turned bearish on the stock market in general. While I got bad vibes, I still expected the ARK funds to hold their May and June lows as bottoms. Those expectations blew up last week as the bottom falls out of ARK. Half of the ARK funds I am following broke down to new lows.

Here are the distances from the respective lows at the time of writing (positive means above and negative means below the low):

• ARK Fintech Innovation ETF (ARKF): +4.1%
• ARK Genomic Revolution ETF (ARKG): +18.1%
• ARK Innovation ETF (ARKK): +3.4%
• ARK Autonomous Technology & Robotics ETF (ARKQ): -4.0%
• ARK Next Generation Internet ETF (ARKW): -0.6%
• ARK Space Exploration & Innovation ETF (ARKX): new all-time low

The relative divergence in performance across the funds continues to grow. The list above shows that the fund least sensitive to the macro-economic environment, the genomic (or health care related stocks), is far out-performing the field. Once again, knowing the trend on long-term interest rates tells you everything you need to know about the performance of the ARK funds. The iShares 20+ Year Treasury Bond ETF (TLT) was trying to hold support at its 50DMA (the red line below) when I wrote about the ARK bottoms. The subsequent breakdown supported my later bearish read on the market. The persistent downtrend in TLT (which represents a persistent increase in interest rates) dragged down the stock market in general and took down the ARK funds across the board as well.

The Levels

ARK Autonomous Technology & Robotics ETF (ARKQ)

I covered my short position in ARK Autonomous Technology & Robotics ETF (ARKQ) in late August. At the time, I assumed the bottom in ARKQ would hold. I was correct for a while. I failed to get short again after ARKQ failed at downtrending 20DMA resistance (the dotted line below). Now, ARKQ looks positioned to eventually test its pre-pandemic high. As a reminder, I short ARKQ to hedge my other long positions in ARK funds.

ARK Next Generation Internet ETF (ARKW)

The ARK Next Generation Internet ETF (ARKW) cracked a marginal new low last week. ARKQ is now positioned to test support from its pandemic low. This ARK fund, which surprisingly includes Tesla (TSLA), looks like it will stay poetically trapped between its pre-pandemic high and pandemic low for quite some time….at best.

ARK Space Exploration & Innovation ETF (ARKX)

The ARK Space Exploration & Innovation ETF (ARKX) closed last week at a new all-time low. I have been consistently skeptical of this fund. The technicals continue to be challenging for ARKX as its shorter trading history does not provide guidance for support levels. With the bottom falling out, the end of the selling in ARKX is anyone’s guess. If ARKX trades much lower from here, I will not be surprised to see this fund close down. Liquidity is very low with an average daily trading volume of just 92K. Compare this to the 24M shares traded on an average day for ARKK.

ARK Fintech Innovation ETF (ARKF)

ARKF now has a very short roster of stocks. This ARK fund has a surprising mix of stocks that are obviously fintech to ones where I have to stop and scratch my head. ARKF even includes a bet on the housing market! The upshot is that ARKF includes some stocks that could prove less sensitive to the macro-economic environment. Regardless, the technicals deteriorated once ARKF fell below its former all-time low for a second time in September. If the bottom falls out of ARKF, I will have to abandon ship and wait another day for a better entry point.

For comparison, the Financial Select Sector SPDR Fund (XLF) is testing its June/July lows. Yet, XLF remains a healthy 75.8% above its pandemic low. ARKF has paid a heavy price for its speculative positioning!

ARK Genomic Revolution ETF (ARKG)

ARKG officially hit trouble once it fell away from the converged resistance at its pre-pandemic high, its 50DMA, and its 20DMA. As I stated earlier, ARKG is faring a lot better relative to its lows thanks to its positioning in health care. For comparison, iShares Biotechnology ETF (IBB) trades 9.0% above its June low. However, all this performance will be little consolation if rising rates drive extremes in risk aversion that make speculative biotech names increasingly unattractive. This space can be particularly treacherous when cash-strapped firms desperately reach out to financial markets to sell equity and/or raise more debt at high rates.

My October call spread in ARKG looks like it will end up worthless. I am somewhat fortunate I already took profits in shares. I will not buy back into shares unless ARKG creates a successful test of June lows and/or breaks out above resistance again.

ARK Innovation ETF (ARKK)

As an example of my sentiment shift in the ARK funds, I actually bought ARKK put options last week. I flipped them very quickly for a small profit, but the experience reminded me of how I started the year betting on the downtrend in ARK funds. So I find it a bit ironic I find myself now holding a small number of ARKK shares hoping the latest bottom does not fall out. Like ARKF, I will abandon ship if ARKK breaks its May/June lows. More specifically, I will abandon ship if ARKK closes below its pandemic low. Such a break will mark a major milestone of pain and damage for ARK’s flagship fund.

The Trade As the Bottom Falls Out

via GIPHY

The stock market is currently deeply oversold. As a result, I flipped (cautiously) bullish on the stock market in general. Accordingly, I will not sell anything into this panic even if the bottom falls out during this oversold cycle. This contradiction in trading strategies presents quite a quandary for me. If the selling continues from here, I will have to wait for the next rally to sell my ARK holdings at better prices. I may even need to cycle through some bearish ARK bets along the way. If ARK (and the stock market) bounces from here, I will breathe a sigh of relief…that unfortunately may be temporary. I need to remember to keep a close eye on interest rates!

Be careful out there!

Full disclosure: long ARKF, long ARKK, long ARKG call spread