The current rally in stocks can be quite astounding to the beholder, and I’m sure that the residual 22% hole of portfolio exposure will swiftly be filled by eager money managers dreading not to be first in any rally.
Ark Fund’s Cathie Wood, the mascot of the 2020 Tech rally, went on business TV yesterday to chime in on the current environment in the stock market. She was explaining how they used “a number of papers” to make clear to their clients how severely dropping stocks are great prospects for the next decade or longer to come. Problem is that the stock market doesn’t care about papers, opinions and what a company ‘should be worth’.
Ark’s funds trading under ARKK, ARKQ, ARKG, etc., have rallied strongly since the start of the year, with the flgship ARKK being up more than 50% from its Dec 28 Lows. That however is only impressive if seen in isolation – if you look at a long-term chart of fund flows, you’ll see that the majority of client money was pumped into Ark’s funds at the beginning of 2021, most of whom saw their money erode by 70-80% over that time.
Feb/March 2021 of course eerily nailed the top in the growth stock market, as could be witnessed by the demise of leading growth stocks of the time, including ZM, DOCU, TDOC, PTON, BEAM, DKNG, EXAS, TWLO or PACB (or those that were fighting longer without significant price progress, e.g. ROKU, TSLA, U, SQ or SHOP). Most of these are still the top holdings of Wood’s funds, the latter of which were yesterday crowned by Wood as the “New Nasdaq”. Hubris, anyone?
I don’t want to needlessly bash on Wood, but there are a couple of points to be kept in mind. ARKK, from where it is today, would need to rally about 260% through extremely thick overhead selling supply to get the large portion of client money in ARKK back up to where it already was, only to reach a break-even point without profits.
And that would mean that the majority of ARKK’s stocks would need to rally substantially. Not only will many of the holdings in ARKK not rally substantially anymore since institutional interest in them has dissipated, but if they will come higher again at all, this will be after a long time. History shows that such stocks tend to remain dead in the water for decades to come. Only look at CSCO or QCOM, which ruminated below their old bull market Highs for more than two decades.
I have the impression that this recent rally in the indies is largely driven by short-covering as well as bottom-fishing in the same old chewed-through tech and FAANG stocks by a largely over-complacent public, all while there is a general lack of high-quality new merchandise moving out. I think that, with such FOMO momentum, we might be entering a moment that will draw many inexperienced speculators in a large bull trap.
Potentially a following roll-over in the course of the year will serve as the long-needed ‘cleansing’ of sentiment. This does not have to happen tomorrow, next week or even this month. But if the market does not improve substantially under the hood, I see more downside in the markets in the intermediate- to long-term.
