It’s tough out there for investors right now, this is a traders’ market! The QQQ’s have been down every day this week and all pops have been sold. Growth stocks have been in a bear market for a while now with funds like ARKK in significant downtrends, and it seems as though Big Tech is finally doing some catch up.

The top in growth stocks was made around Feb/March 2021. 

This was only a month after GME ran from under $20 to over $450 in the space of a few weeks. This comes as no surprise, usually pullbacks in markets come after irrational exuberance in certain stocks. Previous examples include blow-off tops in TLRY, BYND, and TSLA. 

One casualty of this change in market sentiment has been stock market darling Cathie Wood and her flagship fund ARKK.

Ark Innovation ETF (ARKK) is Cathie Wood’s flagship fund. She was behind TSLA’s $3000 (pre-split) target when it was trading below $300 (pre-split), and most on the Street were still skeptical. Her 10x call came to fruition, and she was hailed as the next big thing.

Throughout 2020 and 2021, her funds received massive inflows and were up over 300%. However, since February 2021, the ARKK fund is down over 50%, and many of her high growth, money-losing companies are down 60% or more. Besides TSLA, ARKK’s main holdings include ROKU, TDOC, SQ, ZM, SHOP, SPOT, TWLO, and COIN.

ROKU down over 65% from the highs

This peak in February marked the top for most high-growth revenue stocks that do not turn a profit. These stocks have been selling off for almost a year whilst money was rotated into Mining/Resource companies, and large FAANG stocks like Apple and NVDA continued higher. Over the last few weeks, as stocks like AAPL failed to make new highs, we are seeing a correction in the overall market. 

The question remains, is this the beginning of a bear market? Or will these already oversold tech stocks find a bid and help the overall market continue its record bull run?

ARKK down 50% from its highs

I believe ARKK will be a major barometer of Risk-on/Risk-off sentiment over the next few weeks. When it has approached new 52-week lows, it has coincided with some heavy down days in the market in recent days. I will be watching what ARKK is doing closely and use it as my Risk-on/ Risk-off sentiment indicator. 

Right now is definitely a risk-off environment. In fact, yesterday was the first time in over 20 years that the Nasdaq was up 1%+ intraday and finished down more than 1% on back-to-back days. 

However, these high-growth dog meat companies are approaching much better valuations, down 60% or more from their highs. As the large-cap names catch up a little bit and sell off as well, I believe we will see some rotation back into stocks such as those that ARKK holds, at least for the short term sooner rather than later. Given how oversold these names are, when the time is right, the bounce could be significant. When the indicators line up, or when I am ready to buy some real market panic, I will be sure to let subscribers know!

Bottom Line

As the broader markets sell-off, there are not many places to hide for investors. 

This is especially true for tech investors such as Cathie Wood, whose ARKK fund has made significant bets on the future, investing in high revenue growth and low or mostly negative income companies. The market has not been kind to holders of these stocks for almost a year now as they continue to get the Kibosh.

In the last couple of days and in recent weeks, the large-cap names and the overall market is doing some “catchup”, being sold off from the highs as high growth names continue to make 52-week lows. 

Is this the beginning of a bear market? Possibly. However, given how oversold these tech names are, it is much more likely that the overall market is in a correction phase, and at some point, there will be a rotation back into these former high flyers down 60% or more. I am watching ARKK and these individual high-growth names for signs of capitulation. When the time is right, the bounce trade could be significant!