Cathie’s Revenge: Tech Trades Bust Loose

Despite key missteps and throngs of disillusioned shareholders, Cathie Wood’s infamous ARK Innovation ETF (ARKK) has posted a significant comeback this year as its beaten-down components begin to post massive base breakouts.

But will Cathie’s army of innovation investors reap the benefits?

Probably not.

As ARKK rallies, investors are taking the opportunity to flee the fund, declares The Wall Street Journal.

Selling out of ARKK as it plummeted from the stratosphere isn’t a new phenomenon. In fact, the WSJ notes that more than $700 million from the fund over the past 12 months.

This fact shouldn’t surprise anyone. After all, investors notoriously buy into these popular funds as they’re peaking, only to ditch their shares at the worst possible moments. And ARKK believers are certainly not immune to the ol’ buy high, sell low trap.

“The ARKK fund has an 11% annualized average return since inception, but the average ARKK investor has lost 21% on a dollar-weighted, annualized basis,” the WSJ continues, citing FactSet data.

This raises an even bigger question:

How many times can the world leave an investment theme for dead before it explodes higher and proves everyone wrong?

We’ve discussed at length some of the forgotten tech-growth names from the Covid Bubble catching higher as market conditions improved this year. During the first half of 2023, we witnessed more than a few favorable earnings reactions as many of these stocks were building massive bases. Now, after several head fakes and retracements, we’re starting to see these stocks sustain breakout moves and actually extend higher.

As a result, ARKK has already jumped as much as 60% since the beginning of the year. But the stocks fueling the run weren’t all “easy” trades to ride in Q1 and Q2. In fact, the ARKK comeback has been anything but a straight line.

The initial snapback began right as the calendar flipped to January. ARKK rocketed higher by nearly 50% before it flamed out at the start of February, giving back much of its year-to-date gains just as quickly as it rallied. Even more concerning was a brief drop below $35 in May as ARKK tested its March lows. The fund had already slipped below its 200-day moving average and appeared destined for lower prices.

But a big breakdown never materialized. That $35 test held, and ARKK managed to vault off its 200-day moving average following the regional banking crisis scare. It steadily pushed higher — and now has its August 2022 relief rally highs in sight.


We discussed how it would be a good idea to remain on the lookout for those individual tech-growth stocks that are completing big bases for explosive moves higher back when ARKK was first pushing back toward $40 in May. It now feels as if a new ARKK component (or adjacent tech-growth stock) is posting a base breakout every day.

As traders, we want to capitalize on these impressive moves — without taking on any unnecessary risk. The last thing we want is to end up like the Cult of Cathie who have ridden ARKK down from the highs and are unloading their shares at the worst possible moment.

With that in mind, here’s how you can navigate the tech-growth space without losing all your cash — or sanity:

  1. Buy the breakouts — but don’t count on a new Covid Bubble. 

We’ve discussed “echo rallies” before. This is the idea that former bubble stocks can power higher, only to eventually roll over and lead to new lows without ever returning to their former glory. An echo rally will likely suck many sold out bulls back into a stock, only to once again punish them by sharply reversing after reporting poor earnings or revealing other fundamentally bearish news.

I suspect many (but not all) of the tech-growth darlings from the Covid Bubble era will eventually succumb to this fate. Sure, some will find a floor and ultimately become viable businesses in the long-term. But others will fail. Some will be zeros. Others will get bought out by bigger fish.

When we buy these tech-growth breakouts, we cannot assume they will automatically rush back to those bubble highs. Strict stop losses and profit targets can help mitigate this risk.

  1. Ignore the tech cheerleaders. 

Cathie Wood built her empire on outrageous predictions and outlandish price targets for her favorite stocks.

So it’s no surprise that the 2022 bear market did nothing to change her wildly optimistic outlook. Just a few weeks ago, she proclaimed that Tesla Inc. (TSLA) shares will top $2,000 by 2027 — which would require a rally of more than 1,000% over the next five years.

There’s no reason we should pay any attention to this sideshow. Big price targets that far into the future have no bearing on how a stock like TSLA will perform in the weeks and months ahead.

Plus, it’s all too easy to justify holding onto a failed investment when you’re clinging to these big market stories. If you find yourself attempting to calculate how a futuristic robo taxi fleet will save a broken trade, it’s probably time to cut your losses and move on.

  1. Market conditions matter!

Stocks have been red hot lately — and these improved market conditions are responsible for more breakouts sticking and the rising tide that’s helping dubious stocks gain traction alongside the market leaders.

Remember: the market won’t stay this hot forever! I doubt it stays hot the entire summer, for that matter. We will eventually have to deal with backfilling and consolidation. Stocks can’t go straight up forever.

When the market does level out, I expect we’ll also see sharp retracements among the tech-growth breakouts. Maybe not all — but certainly some of the biggest movers will give back a significant portion of their recent gains. Taking at least partial profits early and often can prevent the pain of watching a big gain evaporate when market conditions abruptly change.

The Daily Reckoning