ARK Innovation ETF - Can It Get Worse?

As the market moves away from higher valued stocks, tech ETFs are under increased pressure, and some question the wisdom of the tech bet.

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The night is darkest before the dawn

When tech stocks, and particularly Tesla, was rocketing higher, many were singing Cathie Wood's praise for her risky picks. But, as inflation rose and expectations of tighter monetary policy took hold, her flagship fund has been underperforming.

The reasons for Wood's picks are generally long-term. Take Tesla, for example, expecting a shift in the way people drive over the next decade. The price shift in shares over a few months in the middle of the most aggressive tightening cycle since the '80s doesn't contradict the long-term goals of the fund.

So, does that mean it's a good time to jump in?

Well, that's part of the problem. Tech stocks are under pressure as the Fed drains liquidity to fight inflation. Normalization isn't expected until at least several months, so the conditions that drove the ETF down could persist for some time. But that doesn't mean that a rebound in the near term should be completely discounted. The market tries to anticipate moves, and once the "froth" from the extraordinary monetary policy measures is adjusted for, the stocks in the portfolio could stage a rebound.

Tesla is less than 10% of the stocks in the ETF, but many of the others, such as Roku and Zoom are even more volatile. Although volatility has a negative connotation, that can also mean moving higher. Despite the wide swings in the fund over the last couple of years, it still has better performance than the S&P 500. For now. Given that 90% of the portfolio is exposed to the US market, anyone banking on ARK staging a recovery is probably eagerly waiting for the Fed to signal that the tightening cycle is near completion.

ARKK at ~2-year low

The ARK ETF fund has recently slipped to below where it was at the start of the pandemic. In fact, it hit a ~2-year low at $35. But this leaves us with a bullish divergence back-to-back, which
has signalled at least short-term rallies in the past.

If ARKK does not weaken below its major support, the ETF could climb above its 10-day average near $42.20 and head for the next swing support (now resistance) at $52. A break of that level would expose the 50-day average at $56.47. Only then can we start talking about a potential reversal.

If bulls fail to recapture the 10MA though as this has been the case since the 50/10-day crossover on May 4th, ARKK will probably slide to new territories. Historical price action hints at $35 and $30. Anything below there would be a blow.

Source: Spreadex trading platform

Key takeaways

Cathie Wood's flagship fund is underperforming due to tighter monetary policy, yet her picks do not contradict the long-term goals of the fund. The ETF is more likely to recover when the Fed starts signalling that tightening is near its end, but a short-term rally should not be completely discounted.