Absolutely everything goes up

The ARK Innovation Fund has been going downhill for a while. In fact, I’ve gotten so used to ARKK underperforming the S&P 500 that I almost thought again last month when I realized the trend appeared to have changed.

Today we’ll discuss why this ETF has chronically underperformed, how ARKK’s top holdings have led to a dramatic turn to bullishness, and what renewed strength in emerging tech sectors means to the markets.

Endless cons for ARK Innovation

There is no denying that Cathie Wood has done an impeccable job of marketing her company and her method of identifying potential winners. The reality, however, is a history of chronic underperformance.

In 2020, in the midst of the COVID pandemic, ARKK surged over 150% for the year. That far outpaced the 49% rise for the Nasdaq 100 and the meager 18% rise for the S&P 500. As we swiped every single grape in the grocery bag and braced ourselves for a long stretch of working from home, the technologies enabled us to do that This gave ARKK holdings a strong year of performance.

In 2021, leadership shifted fundamentally: mega-cap FAANG stocks began dominating our thinking and the initial rally in pandemic stocks like PTON and ZM began to fizzle out. ARKK is down 24% while the Nasdaq 100 and S&P 500 are each up over 26% for the year.

In 2022, the bear market pushed everything lower, and ARKK’s -67% for the calendar year meant it again significantly underperformed the major averages. The Nasdaq 100 lost about 33% in 2022 and the S&P 500 lost 18% of its value.

That brings us to 2023, where the ARK Innovation ETF is up over 60% year-to-date, tripling the return of the S&P 500 and far outpacing the Nasdaq 100’s 43% gain. The names that detracted the most from ARKK’s returns now appear to have given the fund a strong year with outperformance.

Basically, as long as new technologies are seen as the market leaders, the ARK Innovation ETF is a fantastic way to take advantage of this theme. Unfortunately, as of 2020, that is no longer the case. Perhaps now is the time to revisit this topic?

Breakdown of top holdings

Let’s look at ARK Innovation Fund’s top five holdings and see how this ETF has been able to reverse performance and boost returns.

ARKK’s largest position is Tesla (TSLA), and it is interesting to note that TSLA actually made a new low in January, while the S&P 500 and Nasdaq bottomed in October. After an initial rally earlier in the year, the stock fell in March and April before surging in May. That February top was roughly a 38.2% retracement of the November 2021-January 2023 sell-off.

Now we see TSLA approaching the “big round numbers” resistance around $300, which is also the 61.8% Fibonacci retracement level. A series of price spikes around $310 lead me to expect resistance in the $300-$310 range, which is shaded green on my chart.

Coinbase (COIN) has pushed the crypto recovery theme into 2023, bringing further upside catalysts this week for a stock that has already tripled from its January low. The February and March highs just above $80 were my main zone of resistance and this was broken with authority this week on the way above $100 and beyond.

Now that the August 2022 high is in play, the extremely overbought conditions suggest, in my opinion, that there is more than likely more gas in the tank. The kicker is that once COIN breaks $120, there is no major technical resistance until around $200 high.

The Chart of Roku (ROKU) is the story of ARKK in a nutshell. The left two-thirds of my chart shows a painfully consistent downtrend with lower lows and lower highs. But that makes the significantly higher low in May this year all the more meaningful!

Now the stock has completed a classic rotation above the 200-day moving average and made a new high above $75 this week. As long as $75 holds, I would say this is a confirmed uptrend.

Now we have our first example of a key attitude that still appears to be in a downward spiral. While all of the stocks discussed previously bottomed in January, Zoom (ZM) actually made yet another new low in May. For now, the $60 level is holding as support but I have not seen enough buying power on the chart to confirm a reversal to the upside.

The stock is currently testing its 200-day moving average, which means it could “draw a ROKU” and complete the upward rotation. But that just hasn’t happened yet.

Block (SQ) is another chart that I would say still has a lot to prove. The May low of around $55 is roughly close to the October 2022 low, so support has remained firm for now. But until this chart breaks the established resistance by $90 (pink dashed line) I would consider that the base pattern and not much more.

Renewed Strength in Forgotten Stocks

What does it mean that charts like ROKU have experienced such a dramatic rotation from down phase to up phase? And what does that have to do with it? bearish divergences we’ve seen in the Mega Cap Growth Stocks?

I would say that this is part of a larger rotation away from the dominance of FAANG stocks and into other areas of the market. And I think that’s not just affecting the smaller tech and small cap stocks, but other sectors like industrials and financials that are on offer here as well.

The story of the first half of 2023 was one of tight leadership and mega caps relative to everything else. Now we are witnessing a kind of “everything rally” that also includes other asset classes such as commodities and cryptocurrencies.

Maybe we’ll see some more Bearish pullback scenarios are emerging, and it’s always worth considering the implications of a broader decline in major benchmarks. But for now, the strength of charts like ARKK suggests that the bullish phase of the market holds more upside potential.

RR#6,

dave

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David Keller, CMT

Chief Market Strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be applied without first assessing your personal and financial situation or consulting a financial professional.

At the time of publication, the author held no positions in the securities mentioned. All opinions expressed herein are solely those of the author and in no way reflect the views or opinions of any other person or entity.