Be Wary of a Dot-com Era Bull Trap in Cathie Wood's Ark Fund (ARKK) - JPMorgan

July 15, 2021 9:55 AM EDT
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Price: $121.50 +2.47%

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JPMorgan strategist Shawn Quigg believes we are witnessing bubbles in certain parts of the market, similar to a dot-com bubble we saw in 2000.

Extremely high speculation in high-growth sub-sectors year-to-date is making growth-based funds act as they’re in a bubble. The ARK Innovation ETF (NYSE: ARKK), managed by Cathie Wood, may be luring investors into a bull trap scenario, Quigg argues.

“We continue to favor the outperformance of cyclicals/value-based assets amid the ongoing economic reopening, and an anticipated pick-up in Treasury yields in 2H. A rise in yields and a shift in the growth dynamic of the economy in-line with our value-based view could spark a bull-trap reversal in ARKK shares. Moreover, we are also witnessing rising dispersion between the QQQ and ARKK as large staple-tech stocks accelerate gains against disruptive-tech stocks (Fig. 4). We recommend investors purchase ARKK October 105 strike puts for $4.50, indicatively ($118.17 reference price), taking advantage of implied volatility near a yearly low despite the potential for shares to enter a broader capitulation phase,” the strategist wrote in a note.

ARKK price peaked in February before breaking below key technical supports (e.g., 50, 100, 200-day moving averages) in the coming months as work-from-home, cryptocurrency, and other trends started to disappear.

“A technical decline in Treasury yields and fear of the Delta variant allowed for a rebound in high-tech growth, and ARKK. Enter the bull trap,” Quigg adds.

Instead, investors should focus on stocks, such as Target (TGT), given that the retail company is benefiting from the economy reopening. To this end, Quigg recommends investors to purchase TGT October 280 strike calls for $3.50, indicatively ($253.63 reference price). The company is also benefiting from strong back to school/work seasonal trends and lean inventories.

Other than Target, Quigg sees other stock replacements as the S&P 500 trades at the new all-time highs.

“Single stock volatility is normalizing from pandemic levels, in some cases to near 5-year lows, making replacing stock in outperformers, or in stocks where upside is limited to reduce delta/portfolio exposure, attractive. We screen the S&P 500 for those liquid members ($10M avg. notional value over a 20d period) that currently trade above, or within 5%, of our year-end price targets, exhibit cheap 3M ATM implied volatility levels (within their lowest quartile over the last 5-years), and where implementation costs <5% of the current stock price. S&P 500 members that screen as attractive stock replacement candidates include KMB, COST, GIS, TGT, TSN, KR, CL, HSY, CPB, AKAM and ORLY,” the JPM strategist concludes.

The ARKK is 5.16% in the red YTD.

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