Cathie Wood’s ARK Innovation ETF is demonstrating bubble-like traits similar to those seen during the excessive speculation of internet-related companies in the late 1990s, and could be luring investors into a “bull trap,” according to JPMorgan strategist Shawn Quigg.
In a note dated July 15, Quigg wrote that a second-half pick-up in Treasury yields and a shift in the growth dynamic of the economy could trigger a bull-trap reversal of shares in the exchange-traded fund.
“A looming rise in yields could be a catalyst to accelerate ARKK shares lower, in addition to the continued outperformance of large staple-tech stocks over disruptive-tech stocks, and pressing ARKK into the capitulation phase,” he wrote.
Investors should consider betting against the fund with options, he said.
He recommended investors buy ARKK October $105 strike puts, or the price 11% below last Wednesday’s closing, to take advantage of implied volatility that is near a yearly low “despite the potential for shares to enter a broader capitulation phase.”
The 10-year Treasury yield is down 27% from its peak in March to about 1.26% as of Monday. This, along with fear of the economic impact of the delta variant of COVID-19, prompted a rebound in high-tech growth shares , along with the value of ARKK, Quigg said. Lower bond yields ordinarily tend to imply higher stock prices.
But the recent move in Treasury yields is only technical and isn’t indicative of broader investor concern surrounding the health of the economy, or waning inflation outlook, he said.
JPMorgan expects cyclical and value assets to outperform during post-pandemic recovery and reopening.
Popularity of high-growth stocks like Tesla and COVID-19 winners like Zoom helped Wood’s flagship ETF become the top-performing actively-managed US ETF in 2020, according to Morningstar. But it has fallen more than 25% since mid-February through July .