Is ARKK and Cathie Woods time up? J.Powells' clock is ticking...

AMEX:ARKK   ARK Innovation ETF
Whether it is bitcoin , SPACs, shorted meme stocks, Tesla or other heavily priced in Growth stocks (High Price/Book value), all of these speculative assets have one common factor, that is the cheapness/availability of money. However, this may all change if in the next 2-3 readings inflation pressure are proven to be persistent. Relatively, will be a very in-detail idea, but bear with me.

Firstly, before I get into analyzing other factors, as the chart shows, the current risk-reward ratio on ARKK is skewed towards the short side with a strategy of directly shorting ARKK , or buying OTM puts @105 or 80, with a stop-loss at 130. There are several fundamentals reasons for shorting ARKK:

1) The concentrated positions of ARKK into few names as ARKK is an actively managed fund where on the way down it would become increasingly problematic for Cathie to cut losing positions, with a potential of a self-enforcing liquidity spiral.

2) The largest holdings such as Tesla are priced in heavily above the SPX price/ earnings (Forward P/E =115, SPX P/E= current 35, historical 16, price/book value ratios(28 vs 4.7), which is simply unsustainable in terms of future expected returns, unless Tesla takes over the world, which simply won't happen by any stretch of the imagination. Granted there seems to be a trend continuation on Tesla , although it may as well be a trap if the FED changes the current course (a discussion will follow below).

3) In the last few weeks since the IPO of $HOOD, ARKKs correlation to bitcoin futures has been 60%, although historical correlation since 2017 is only 20%. It begs the question as ARKK accumulates more and more names whose value is directly derived from cryptocurrencies ( Tesla , Robinhood, Coinbase, SQ and others), is holding ARKK roughly the same as holding bitcoin /cryptos as they are both primarily driven by the same factor?

Well it all boils down to understanding the key factor, which as mentioned appears to be the cheapness/availability of money. The question is when will money stop being cheap as it is today? The long drawn out debate will the FED taper, or even worse when will the FED start hiking. To understand how the FED sets their policy, it is based on whether or not they are fulfilling their congress given mandates which are price stability ( inflation within target range) and maximum employment (unemployment at or below the long term rate ~5%). Currently based on the spot rates, the market is pricing in that there will be 1 hike in 2020 (Forward 1 year rate in 1 year, ~0.36) and roughly 2 more hikes in 2023. With balance sheet tapering (where the FED unloads bonds to the market in return for cash, or does not buys/tapers as much assets), the current projections are within the start of next year. However, plans may change as they quickly did back in 2019. From this chart it can be clearly observed that during the last policy normalization in 2016 (, the FED only started hiking once unemployment went below 5% (roughly the long term unemployment rate). In a normal environment where the FED isn't trapped by their QE policies, where both inflation and real growth rate are far exceeding their targets as stated by Taylor rule(nominal rates = neutral rate + inflation + 0.5 * ( inflation - inflation target ) + 0.5 * (real gdp growth - potential gdp growth), the FED is bound to hike. But they've used the maximum employment "excuse" to not do so.

This is why the recent reading where unemployment went down to 5.4% from 5.9% is scary. This meant that the fed is closer to fulfilling their maximum employment mandate, however they are far beyond their inflation target rate of about 2% =>>>> implying higher probability of more earlier hawkish policy to also fulfill the price stability mandate, because they don't have the maximum employment excuse any longer. Based on the recent readings (services PMI 64 vs 60, unemployment and todays inflation ) bonds quickly reacted The current 5 year average (breakeven) inflation expectations are back within the inflation target of around 2% (2.5%-forecasting premium ~0.5%,, although this rate can hardly be trusted any longer as the FED holds roughly 1/5 th of the TIPS market.

This is my attempt of shortening this long story, which relates to ARKK , as ARKK experienced two drawdowns in March and May of ~-30 to -20% during the last episodes of inflation fears when the 10 year yields went to 1.75%. This suggests that ARKK is extremely sensitive to yields above 1.5% given its growth factor exposure. A yield steepening caused by less quantitative easing and more likely rate hikes, certainly implies a choppy market ahead (at best) where value is gaining above growth ( SPX at these levels has returned nearly 20% for the year 2021 so far (4450/3750 -1 = 18.5% +~2% div yield), which is more than a standard deviation above the average of ~8%. It is simply unsustainable to continue the current fiscal and monetary policy stances that has driven asset prices higher mainly due to the multiples expansion, without mitigating the inflation risks that are bound to appear.

Thank you for following along! If you have any questions or points to debate, make sure to leave them in the comments.

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The QQQs in a wedge : Large caps, SPX futures getting heated up:
Comment: This trade perhaps might be too early. But nonetheless, it seems that the market is starting to build pressure, as reaches the pre-pandemic levels.