Comparing ARKK to the NASDAQ from 2000 – 2002

By admin_45 in Blog

Today marks the 1-year anniversary of the all-time high in Cathie Wood’s widely followed ARK Innovation ETF (ARKK). We mention this fund not to pick on its performance over the last year (down 54 percent), but rather to use it as a general benchmark for speculative tech names and what it may signal for this theme going forward. While ARKK often changes its holdings, here are the top 10 currently to give you a sense of the types of names it typically owns:

• Tesla (TSLA, 8.1 pct weight): Electric car company
• Roku (ROKU, 6.5 pct): Streaming platform
• Teledoc (TDOC, 6.5 pct): Virtual healthcare services
• Zoom Video Communications (ZM, 6.2 pct): Video communication platform
• Coinbase (COIN, 5.4 pct): Financial technology/virtual currencies
• Exact Sciences (EXAS, 5.2 pct): Cancer screening and diagnostics
• Unity Software (U, 5.0 pct): Video game software development
• Twilio (TWLO, 4.2 pct): Cloud communications platform
• UiPath (PATH, 4.2 pct): Enterprise automation software company
• Intellia Therapeutics (NTLA, 4.2 pct): Clinical-stage genome editing company

While many spicy and less- or un-profitable tech stocks surged higher during the first year of the pandemic, their downward trajectories over the last year are often likened to the bursting of the 1990s dot com bubble. Therefore, we compared the one-year performance of ARKK from its high last year on February 12th, 2021 to the same timeframe for the NASDAQ following its peak on March 10th, 2000.

Here’s what we found:

• ARKK has broadly tracked the NASDAQ’s 2000/early 2001 experience. Today marks the 253rd trading day from ARKK’s all-time high and on the same day in 2001 the NASDAQ was down 60 percent from its dot-com bubble peak. As of today’s close, ARKK is down 54 pct from February 12th, 2021.
• If the 2000/2001 analog continues, we can expect ARKK to continue trending lower over the next three weeks. The NASDAQ dropped 18.7 pct over the following 16 trading days from today (day 253) in 2001.
• Beyond the next 3 weeks, back in 2001 the NASDAQ got some reprieve by rallying 41 pct over the following 33 trading days (about a month and a half). Yes, bear market rallies can be impressive…
  
  It then rolled over, however, falling by 38 pct over the subsequent 81 trading days (4 months) to its lowest level in 2001. That marked the 385th trading day from the NASDAQ’s peak on March 10th, 2000, or roughly a year and a half later. This low also came about a week and a half after the 9/11 terror attacks before the NASDAQ rallied into year-end.
• The NASDAQ’s early 2000s trough was not until October 9th, 2002, or a little over two and a half years from its March 2000 peak.

Here’s what we make of this data:

#1: Speculative tech names have been under intense pressure for an entire year and that’s likely to continue over the coming weeks. ARKK’s latest one-year performance from its peak has generally followed the same downward path as the NASDAQ in the early 2000s, the best analog to overvalued tech stocks deflating. The NASDAQ’s experience says that will last for roughly 3 more weeks before getting a temporary reprieve. For what it’s worth, the March Fed meeting is just over 3 weeks away…

#2: While the NASDAQ declined for over a year based on weakening fundamentals, its selloff grew more macro event-driven towards the end of 2001 and in 2002, which is a cautionary tale for today. For example, the NASDAQ’s 2001 trough came after the 9/11 terror attacks, and it did not bottom until October 2002 going into Gulf War II. Given that speculative tech has a beta of +1.0 and correlations go to 1 during volatile periods, the selloff of these types of names could be exacerbated by geopolitical shocks or tensions as we’re seeing now with Russia and Ukraine.

#3: History says the spec tech selloff still has a long way to go using the NASDAQ’s early 2000s experience. After the NASDAQ declined by 60 percent over the first year from its peak in March 2000, it then fell another 45 pct to its trough on October 9th, 2002. That was largely due to geopolitical events, such as the 9/11 terror attacks and Gulf War II, so it’s not an apples-to-apples comparison to today. But there are still other risks to consider in the present, especially when it comes to uncertainty about the US economy as the Federal Reserve tightens monetary policy this year