Nasdaq Snapback: Cathie Woods’ ARKK Finally Catches a Break
After getting absolutely torched four out of the past five sessions, big tech and momentum investments — like Cathie Woods’ ARK Innovation ETF (NYSEArca: ARKK) — finally got a reprieve this morning.
As of this writing, the mega-cap names of the Nasdaq 100 (NYSEArca: QQQ) are up 3.9% over yesterday and the recent spat of volatility appears to have calmed a bit.
Source: Bloomberg
Despite the seeming return of risk-on mood, however, most questions coming into my inbox are asking if we’re going to see additional pullbacks.
Given that Nasdaq volatility failed to break highs at the end of January, it’s hard to peg this latest correction as much more than a test of support.
But it’s not the volatility in equity markets that concerns me, it’s the volatility in bonds and currencies.
Source: Bloomberg
Treasury bond volatility in particular — as measured by the increase in the MOVE Index — is showing investors are fearful of rising inflation. And worse, that unease has started to bleed over into currencies (yellow) and bond spreads (purple) even as the VIX (white) calms down.
If you’ve been following along, of course, you know those fears are well-founded. Inflation has been running rampant in the commodity space since November.
Source: Bloomberg
And the resulting rise in interest rates on the 10-year treasury has been both sudden and slightly alarming.
Source: Bloomberg
It’s also an incredibly important driver for gold prices, which are highly inversely correlated to interest rates.
Source: Seawolf Research
That means today’s battle between interest rates and markets is not just a critical junction point for big tech.
It’s critical for everything.
And given that the charts for gold, the Nasdaq and the SPY are all scraping along the bottom of their recent ranges, it’s treasury yields that have clearly been winning.
Source: Seawolf Research
But today’s pullback interest rate level of 1.538% brings interest rates back to even with the yield of the S&P 500. At yields above this level, investors are essentially incentivized to sell stocks and buy treasuries — vice versa for the opposite situation.
With 10 and 30-year bond auctions coming up tomorrow and Thursday, we’ll know directionality soon enough. Until then, I’m on the sidelines.
Because if they don’t perform well, interest rates go back up, and everything will likely get torched again.
In This Market, Just Do What’s Working
There’s no reason to overthink things here. Although the momentum basket of FAANG stocks and Tesla Inc. (Nasdaq: TSLA) did post a solid gain today, they remain down 9.4% overall on the month, and just +0.4% over three months.
Meanwhile our high-short interest names like Designer Brands Inc. (NYSE: DBI) and SPDR S&P Retail ETF (NYSEArca: XRT) have been absolutely crushing it — up 33.5% and 15%, respectively.
I think DBI has more room to run, and will benefit from a trifecta of reopening, a return to the office (and therefore a need to buy dress shoes) and still-high short interest.
But XRT has disproportionately benefited from yet another massive run in GameStop, and taking profits here makes sense.
Source: Seawolf Research
Meanwhile high-beta, mid caps, small caps and cyclicals have also performed well. Most of these, however, are energy stocks. With the runup in oil starting to slow down, I’d rather collect a roughly 10% gain in the United States Gasoline Fund (NYSEArca: UGA) and redeploy that on a pullback, where it can be more productive.
In the meantime though, keep your heads up… This market can turn on a dime at any point.
All the best,
Matt Warder
