Cathie Wood's ARK Innovation: The Best Trading Strategy

Cathie Wood's ARK Innovation: The Best Trading Strategy ...

Cathie Wood, a well-known investment officer, believes the ARK Innovation ETF () will return because to growth and technology it's overdue for a move.

ARKK's share price has been largely a correction of years of irrational exuberance that lasted until early 2021, according to skeptics. The current context of high inflation and rising interest rates should be a concern for aggressive growth investing.

The argument you submitted is straightforward. Regardless of what side you considered, the most effective strategy to trade ARKK is largely agnostic to these fundamental questions. Instead, I believe that entries and exits in this case should be informed primarily by price action.

The recent selloff that followed a late March "dead cat bounce" in ARK Innovation has only supported this concept, which I will talk in more detail below.

Cathie Wood's ARK Innovation: The Best Trading Strategy in Figure 1

DAVID SWANSON | Credit: David SwansonREUTERS

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How to Trade ARKK

In January 2022, I began talking about it.

First, it's helpful if one has the conviction that, over a long period of time (many years, in fact), growth stocks will eventually travel north. If I am able to look beyond the immediate challenges, consider whether or not to: rising consumer prices and yields, the danger of economic slowdown, geopolitical instability, etc.

Notice that ARKK has traded quite a bit like a bubble since 2017. In the five years ended in December 2020, the ETF increased by more than 500 percent. Then, from the peak in February 2021, the fund lost a whopping two-thirds of its value in just a few months.

During the dot-com era, this is a classic bubble behavior that reminded me of the Japanese stock market of the 1980s and the tech-rich Nasdaq index in the 1990s.

Bubbles are a gift to those who know how to play them. In a recent interview, famous money manager Stan Druckenmiller defended the idea of trading bubbles on the way up, even if the fundamentals do not support the prices, provided that investors step out before the burst.

This is precisely why I am assuming ownership of ARKK, the classic bubble of the 2020s, only when the ETF trades above its 50-day moving average. Investors should step away to avoid being caught in a downward spiral.

By doing so, an investor may avoid bullish and bearish spurts. Although the approach does not work quite as well for "regular stocks" or ETFs, it usually works in situations when "the herd" raises prices much higher and lower in a wave-like fashion.

Following the following example, ARKK investors would have performed since the start of 2020: (1) had they simply bought and held the fund, vs. (2) had followed a 50-day moving average strategy.

Figure 2: ARKK buy-hold vs. the 50-day moving average strategy.

Yahoo Finance, DM Martins Research

Notice above how trading ARKK's 50-day moving average in the past 30 months would have resulted in cumulative gains of nearly 100%, much better than the buy-and-hold strategy that would have been virtually flat, and even the S&P 500's returns.

In late March, did you know what happened?

The people who follow me must have noticed something that might harmed my strategy. As recently as March 30, I stated that he was fond of the same moving average guidelines.

Back then, the ETF traded at $71 per share. The fund suffered a mind blowing 26% in market value. Didn't I forget that entry was so important?

Yes and no. While the moving average approach would have triggered a buy on March 30, it would have also triggered a sell on April 5. Therefore, the timed strategy would have resulted month-to-date losses of only 2% vs. a 20% decrease for the buy-and-hold approach.

The recent price action is a valuable lesson in being diligent in the trading process. I believe that the strategy will continue to work for ARKK customers who adopt it.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not affect editorial content. Thanks for the support of Wall Street Memes)

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