Today I’d like to discuss a really interesting battle setting up in ARK Innovation ETF (ARKK), with some big names getting involved. On Monday 16th of August, Dr. Michael Burry of the “Big Short” fame disclosed a short bet against ARKK.
It was disclosed through a regulatory filing known as a 13F, which is a quarterly report that is required to be filed by all institutional investment managers with at least $100 million in assets under management.
The position was done with puts bought representing 235,500 shares short bought before the 30th of June 2021 valued at approximately $30, 800 000 representing approximately 1.5% of Burry’s $2billion portfolio of assets.
This filing being made publicly known and disseminated through media outlets such as Bloomberg and CNBC led to some added retail shorting of ARKK and could provide a nice
Cathy Wood’s ARKK
Cathie Wood really became a star in 2020. She was the most bullish TSLA analyst on The Street. While most had $400 targets for TSLA and some were bearish with $200 targets, she was out on her own with a $4000 bull case. While some laughed and discounted her analysis, her price target proved spot on, with TSLA going over $4000 in 2021 (pre-split).
Wood’s innovation fund ARKK was heavily weighted in TSLA and saw stellar performance. Due to great returns on the portfolio and massive inflows from new investors backing Cathie ARKK, assets under management (AUM) rose from $2billion in 2020 to $21billion as of today.
source: https://ycharts.com/
Now ARKK, as Cathie Wood herself puts it, is a fund based on innovation-based themes. Thus its holdings are based on high revenue growth but mostly negative cash flow companies. In her eyes, just like TSLA, a lot of these companies will continue to grow at a great pace and thus are undervalued. However, given the massive price gains in a lot of her portfolio, some investors now believe that many of these companies are overvalued at these levels and headed for a fall.
The Big Short’s Michael Burry
Perhaps the most prominent of these naysayers is Dr. Michael Burry. He was one of the main characters in the movie ‘The Big Short’ based on true events surrounding investors betting against the market during the housing crisis. Dr. Burry was much reviled for his stance on the housing market bubble until he was proven right, much like Cathie was with her TSLA call. So it is very interesting that these two outsiders are now coming to a head.
Dr. Burry not only has a $30,800,000 short position in ARKK but also has taken a much larger short position taken against TSLA directly worth $731, 000, 000 also by way of put options. He has warned that we are in the biggest stock market bubble in history and has placed his bets accordingly, going after TSLA and ARKK as his overvalued targets. On the other hand, Cathie Wood responded by claiming Dr. Burry doesn’t understand innovation and that we couldn’t be further from a bubble.
In my opinion, over time, Dr. Burry may be proven correct. There are just too many negative cash flow companies in ARKK that are extremely overvalued. Even the ones that have positive earnings are at lofty valuations. Having said that, I like to fade overwhelming market sentiment and there may be a trade on the long side setting up in the short term. I do not let my biases get in the way of good trading opportunities
After Dr. Burry publicly announced his short positions, a lot of retail traders piled into the trade. There were also some large 110 put sweeps valued at $384k on Monday, August 16 expiring on the 10th of September. However, once the initial sell-off from $119 to $115 stabilized, ARKK found some support at the $114 level, an area of previous support. The last time ARKK was at these prices, there was a bounce to $122.70.
A Short-Term Contrarian Bounce?
Given that ARKK already has 11% short interest with 21 million shares short out of 183 million shares outstanding and the fact that a lot of retail is following in Dr. Burry’s trade, a short-term bounce may be on the cards. The $114 level has held, and on Friday, there was $854,000 worth of call sweeps at the 116 and 118 strikes expiring 17th of September. To me, some smart money is playing for a bounce here. In addition, any new shorts that have not already been covered may need to be shaken out of their trades as the market often tests the resolve of weak hands.
60-minute Chart of ARKK, buyers have come in on Monday 23rd of August following some call sweeps on Friday and strength in the QQQ’s
Given my preference to fade overwhelming market sentiment, I will be looking for some further stability in ARKK and stalking a short-term trade on the long side this week. However, I understand that a break of the $114 level puts $105 to $100 into play if the QQQ’s also selloff.
Bottom Line
When a big trader announces a trading position to the world, and a pile of retail traders follows, that presents a trading opportunity. So long as something new hasn’t brought changing fundamentals or fraud to light, I like to fade overwhelming market sentiment, especially when weak hands enter a trade. ARKK is a perfect example of this following Dr. Michael Burry’s disclosure that he was short ARKK. Nothing has changed in the way of fundamentals that the market hasn’t known for a long time. Cathie Wood has been buying stock in high growth negative earnings companies daily for years now with new fund inflows. Although I agree with Dr. Burry’s thesis over the long term, my bias doesn’t prevent me from looking at taking great trading setups the other way. ARKK may be a great short-term bounce candidate to flush out the newly entered weak hands
