The stock market tumbled on Monday as worries about the Covid-19 Delta variants flared up. Most broad-market indexes were down for the day, but one corner is holding up better. The
exchange-traded fund (ticker: ARKK)—the flagship fund of
‘s ARK Invest that focuses on companies with disruptive technologies or innovative business models—was able to finish the day above break-even, making a 0.64% gain.
That’s the kind of good news the fund needs after losing 11% in the past two weeks, but it might not be indicative of what could happen next, as the ETF has already seen several rounds of such ups and downs this year.
After plunging nearly 37% from February to mid-May, ARK Innovation has made a few efforts to bounce back, but failed multiple times to break the resistance level around $128 per share—in mid-March, mid-April, and late April, respectively. Most recently, from May 13 to the end of June, ARK Innovation climbed 28% to reach above $130, but has since been sliding again. It now trades for about $117.
This boom-and-bust cycle—caused by excessive speculation activities in high-growth stocks—looks a lot like what happened during tech stocks’ dot-com bubble in the early 2000s, wrote J.P. Morgan strategist Shawn Quigg in a note last week. After peaking in March 2000, the
‘s Information Technology sector dropped 30% in April and May, but made a few jumpbacks in the following months before it embarked on a drastic 80% plunge that lasted two years.
The ARK Innovation ETF might lure investors into a similar kind of “bull trap” scenario, wrote Quigg, which means a false signal that seems to suggest that a stock or index’s downtrend has reversed and is now heading upward, when in fact, it will continue to decline.
A declining Treasury yields and fear of the Delta variant has allowed for a rebound in high-tech growth, but Quigg thinks it might not stay long. Given the ongoing economic reopening and above-expectation inflation readings, he expects Treasury yields to rise again soon, which would discount future cash flows, and hurt the valuation of growth-driven stocks.
There has also been a rising disparity between the large staple-tech stocks as represented by the
Trust (QQQ), which invests in the 100 largest nonfinancial companies listed on the Nasdaq exchange, and the disruptive-tech stocks as represented by the ARK Innovation. While the Invesco ETF has gained 12.4% year to date, the ARK fund is 6% down for the year. This could suggest a shift in leadership within the tech realm.
Write to Evie Liu at [email protected]