Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why ARKK Is Surging 4.7% in a Week While the S&P Lags
Transcript
- Lucas: So the ARK Innovation ETF, ticker ARKK, is up four point seven percent in the past five days. That is more than double the NASDAQ's gain and about three times the S&P 500's. Luna: And that is not just a blip. ARKK is up something like eighteen percent over the past month. It is outperforming almost everything. Lucas: Right. And the question is why now. Because ARKK had a brutal 2022 and most of 2023. A lot of those high-conviction names — Roku, Zoom, Teladoc — got absolutely wrecked when rates went up. Luna: But rates have not really moved. The Fed funds rate is still at three point six two percent. So what changed? Lucas: I think what changed is that the market stopped expecting more hikes. Back in April there was chatter that inflation might re-accelerate and the Fed might have to tighten again. That narrative has faded. The effective rate has been flat for months. Luna: So a stable rate environment is enough to reignite the innovation trade? Lucas: It is a big part of it. These are long-duration assets. Their valuations are very sensitive to the discount rate. When the rate outlook stabilizes, the math on holding a stock like Roku or Zoom gets a lot more attractive. Luna: And there is a performance-chasing element too. ARKK was down so much that any hint of good news can trigger a big move up. The fund has a lot of volatility baked in. Lucas: Exactly. But I want to be specific about what is actually driving this. It is not just a generic 'risk-on' rotation. Look at the top holdings. Tesla is the biggest position, and Tesla is up about six percent this week. That helps. But the real juice is coming from names like Roku, which is up twelve percent in five days, and Zoom, up eight percent. Luna: Roku and Zoom both reported earnings recently, right? And the market liked what it saw? Lucas: They did. Roku beat on revenue and gave a decent outlook. Zoom showed that enterprise growth is still happening, even if consumer is soft. So there is some fundamental support here. It is not all sentiment. Luna: That makes me a little more comfortable. Because I remember the 2020-2021 mania where everything went up just because it was an innovation stock. Now it feels more selective. Lucas: It is more selective. And the valuations are not as insane. Roku trades at about four times sales now. That is expensive for a mature company, but for a growth company with improving margins, it is not 2021-level crazy. Luna: So the question is: does this rally have legs? Or is it just a dead-cat bounce in a downtrend? Lucas: I think it has legs in the near term, but I would not call it a new secular bull market for innovation stocks. The macro is still uncertain. GDP growth is only one point six percent annualized. Consumer spending is slowing. These companies need to deliver real revenue growth to justify these prices. Luna: Right. And that is the key difference. In 2020, the market was willing to pay for potential. Now it wants proof. So if ARKK's holdings can show they are growing revenue and controlling costs, the rally can continue. If they stumble, it will unwind fast. Lucas: Exactly. And you can see that in the data. The S&P 500 is up one point five percent this week. The Russell 2000, which is more domestic and more cyclical, is up three point three percent. So the market is actually broadening out. ARKK is just the most extreme version of that. Luna: Which is interesting because earlier in the year, the rally was very narrow — just the Magnificent Seven. Now we are seeing small caps and innovation stocks catch up. Lucas: And that is healthy. A bull market that is too narrow tends to burn out. When you see the Russell 2000 and ARKK both outperforming, it suggests that investors are getting more comfortable with risk across the board. Luna: But it also means that if the macro turns, these are the first stocks to get hit. Lucas: Absolutely. They are high beta. But for now, the momentum is real. And I think it is worth paying attention to what ARKK is telling us about the market's risk appetite. Luna: It is definitely a signal. And I know our listeners are always trying to read those signals. Speaking of which, if you find conversations like this useful — and we hope you do — one small way to support the show is by buying us a coffee. It is at buy me a coffee dot com slash fexingo. It genuinely helps us keep the show ad-free and focused on the analysis. Lucas: Yeah, even a couple of dollars a month makes a difference. It is a simple way to say 'keep going' and we appreciate it. Anyway, back to ARKK. I want to highlight one more thing. Luna: What is that? Lucas: The correlation with the NASDAQ. The NASDAQ is up two point two percent this week. ARKK is up four point seven. That gap has been widening. Historically, when that happens, it tends to precede a broader risk-on move. Not always, but often. Luna: So you are saying ARKK might be a leading indicator for the rest of the market? Lucas: I would not bet the farm on it, but it is worth watching. If ARKK continues to outperform, it suggests that the market is becoming more comfortable with longer-duration, higher-growth names. That could eventually pull the NASDAQ higher too. Luna: Interesting. I also noticed that the ARKK fund has had net inflows in the past two weeks. So it is not just price appreciation — new money is coming in. Lucas: That is a big deal. When a beaten-down ETF starts seeing inflows, it often signals a shift in sentiment. Institutional investors are starting to dip their toes back in. Luna: And what about the short interest? Is there a risk of a short squeeze? Lucas: There is some. ARKK has a short interest of about eight percent of shares outstanding. That is not extreme, but if the rally continues, shorts might cover, which could add fuel. Luna: So all the ingredients are there for a continued run. But you are still cautious? Lucas: I am. Because the macro environment is not supportive of a sustained innovation boom. The Fed is not cutting rates anytime soon. And valuations, while better than 2021, are still elevated. The median stock in ARKK trades at about thirty times forward earnings. That is not cheap. Luna: So it is a trade, not an investment? Lucas: For most people, yes. Unless you have a very long time horizon and can stomach the volatility. Cathie Wood's thesis is that innovation will disrupt every industry and that these companies will grow into their valuations. That might be right over a decade, but over the next year, it could be a bumpy ride. Luna: That is a fair assessment. I think the key takeaway for our listeners is that ARKK is flashing a risk-on signal, but you have to be selective and disciplined. Lucas: Exactly. And we will keep watching it. If the trend continues, we will come back and update you. If it reverses, we will talk about that too.