Analyst sees parallels to the dot-com bubble
Short bets recommended
ARK Innovation, or ARKK for short, the exchange-traded index fund from ARK Invest, is considered the flagship of the investment company. But the ETF cannot repeat the successful development of the previous year in 2021 – since February it has tended to decline. Shawn Quigg, strategist at JPMorgan, is now taking a critical look at the index fund.
Bull trap and dotcom features
In a communication to clients, he stated that the ETF had dot-com bubble-like characteristics. During the 1990s, Internet companies had attracted many investors to invest and speculate. The expert now claims to have identified similar bubble-like properties in ARK Innovation, which could “lure investors into a bull trap,” Quigg continued.
Investors should especially keep an eye on the development of government bond yields, as the analyst sees potential for conflict here: “An impending rise in yields could be a catalyst to accelerate ARKK shares – in addition to the ongoing outperformance of large basic technology stocks compared to disruptive technology stocks – downwards and push ARKK into the surrender phase, “he wrote.
Does Cathie Wood have to sell positions?
In his estimation, this development could force Wood to divest some positions in her ETF. In particular, high-growth tech stocks such as Tesla and Zoom ensured that the ETF achieved a successful performance in 2020. But the increasing economic recovery and the pent-up demand for many cyclical stocks could ensure that value stocks outperform growth stocks. “We are currently seeing dramatic underperformance by value stocks, which have just had their worst month versus growth stocks in two decades,” the analyst wrote.
Advised investors to short
Quigg advised betting against the ETF in light of the fact that he expected there would be a switch and that value stocks should outperform an economic recovery.
Investors should consider betting options against the fund. Specifically, the expert’s recommendation is “ARKK strike puts for October worth USD 105  to buy in order to benefit from the implied volatility “which is close to an annual low. And that” despite the potential for stocks to enter a broader surrender phase, “Quigg continued.
Finanzen.net editorial team
Image Sources: viewimage / Shutterstock.com, Cindy Ord / Getty Images for Bloomberg Businessweek