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In March, I provided it a Robust Purchase rating ARK Innovation ETF (NYSEARCA:ARKK) on the conviction that we will observe a substantial rally in 2023. To date, since that article we’ve observed ARKK yield 13% versus approximately 12% for the S&P 500. Meh.
Nevertheless, given the selloff we have observed in equities as a whole over the previous two months, I believe it is perhaps the correct time to reassess ARKK. It is patently unstable as it aims to seize opportunities in long-range growth trends. From time to time, it succeeds, and from time to time, it does not, so it’s certainly not for everybody. Nonetheless, if you are looking for capital appreciation, I still regard ARKK as a better acquisition than a conventional index fund because I believe we are in a bull market that has yet to materialize.
What is ARKK?
Let’s acquire a refresher on the configuration of ARKK before we evaluate the technical details. I addressed ARKK’s philosophy in the article connected above, so I won’t rehash all of that once more since it hasn’t altered. However, what has altered is the implementation of the philosophy, as the holdings in ARKK modify rather frequently, and in fact, typically shift daily.
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Here’s a glimpse at the present holdings, and you can perceive that ARKK is far from a diversified fund with hundreds of holdings. I prefer ETPs that are concentrated because with extensive diversification, you merely possess the assurance that a group of components will underperform. In other words, we know that the stock market cycle favors certain sectors under varying circumstances, so possessing every sector at all times guarantees that at least some of your money is misplaced. Focused funds aid you outperform the market with the significant caveat that you must be precise with your timing and allocation.
So, we can perceive that ARKK’s holdings are all tech-focused businesses, whether their operations are in auto, payments, etc. Given that it focuses on long-range growth potential, this isn’t unexpected, but again, you have to be comfortable with its inherent volatility and risk.
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Concentration risk is significant with 63% of the fund being in merely the top 10 holdings. Additionally, turnover is 55%, so once again, it is very frequently traded and quite concentrated. As I mentioned, I favor these kinds of funds but I also know many of you do not.
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Tech constitutes about a third, healthcare constitutes a quarter, and communications and consumer discretionary constitute one-sixth. With those four sectors, we are tracking 91% of the fund’s assets. This implies that we can concentrate on these areas for matters like seasonality, which we’ll delve into in a little more detail.
technical approach
Let’s direct our attention to the chart, which to be frank, is somewhat of a mixed bag at this moment. Nevertheless, as long as trendline support remains intact, we should perceive an uptrend for ARKK later this year and into next year.
stock chart
That trendline is the blue line I drew, currently support is just above $41, but bullish. If that line fails, I would not continue to hold ARKK as it indicates a shift in investor sentiment. Moreover, the accumulation/distribution line appears excellent, as it has not wavered during this period of selling. Momentum indicators are mixed as they have shifted out of the oversold zone, but solely to the center line. I’d genuinely like to perceive the RSI and PPO surge above the center line, but bulls may necessitate a test of the trendline to summon the strength to do so.
Normally I employ seasonality to examine upcoming returns, but in ARKK’s case, the holdings change so often that I don’t discern much value in comparing ARKK over time. In other words, the comparison won’t be apples to apples, so it doesn’t matter to me. Nonetheless, what we can do is examine the seasonality of the top sectors in the fund.
Here are the technology ETFs under the ticker XLK for the last five years, the largest sector for ARKK.
stock chart
September is weak, but we’re moving closer to a domestic level. Looking ahead, October is better, but November is very robust, averaging over 5% gains.
Healthcare is next, and it appears even better.
stock chart
After a feeble September, the mean return from October to December is +7.4%, so once again, appearing quite promising.
Finally, we have communication, which certainly appears rather unfavorable.
stock chart
Returns from October to December are nearly stagnant, so that’s not very encouraging. But if we consider these collectively, the outlook for the next three months certainly indicates the possibility of higher prices. Seasonality is unquestionably a secondary indicator, but it is still an indicator, and it is more useful to bulls than bears right now.
Bhavna says we are prepared for the rally
One final point here is on sentiment, which appears exceedingly pessimistic to me right now. As we know, sentiment is a splendid contrarian indicator, so when investors become extremely pessimistic, it typically signifies a rally is approaching. My preferred sentiment gauge is the equity put/call ratio, under the ticker $CPCE. Daily CPCE is fairly volatile, so it greatly assists to smooth it out with a moving average, and below, we have the 5-day moving average of CPCE along with some significant information.
stock chart
This is a one-year chart, and it exhibits the 5-day moving average in blue, as well as the 0.80 level. That level represents intensely pessimistic sentiment where many more puts than calls are being acquired relative to conditions commonly seen. This indicator also works conversely when sentiment is excessively bullish. But right now, the 5-day average is 0.85, which is an extremely elevated level of pessimism.
I have displayed vertical blue lines, other times we have witnessed prices reach this high, and every single one of them resulted in rallies. The “worst” of these was a 6% rally, and two of them produced rallies of over 40%. I’m not proposing that we’re going to observe a 40% surge from the current price, but I definitely think we could witness another rally that will be in double digits.
The purpose of sentiment analysis is that if we are already extremely pessimistic, how much worse can it realistically get? Don’t get me wrong, emotions can persist, but probabilities Are we at or near the peak of pessimism for this cycle, which would imply we would be at or near the peak of selling in stocks.
In light of this, I believe we are on the verge of another rally in equities, and that means a rally in ARKK. I am reiterating my Robust Purchase rating.
