From the desk of Tom Bruni @BruniCharting
Tuesday’s Mystery Chart is one of my favorite charts right now, so thank you all for your feedback and participation.
It seems almost everyone was on the same page here, getting involved in some way, shape, or form on the long side.
With that as our backdrop, let’s get into it.
The original chart was an inverted daily line chart of the Ark Innovation ETF relative to the S&P 500 (ARKK/SPY), so everyone that was a buyer (myself included) were actually sellers.
Here’s the actual chart of this ratio breaking down from a nearly 18-month topping pattern to new lows, suggesting this is likely the start of a new long-term period of underperformance for this Ark Innovation ETF.
As long as prices are below 0.1472, the bias is lower and there’s a lot of risk down towards 0.104 over the next 18-months +.
Click on chart to enlarge view.
For those curious what this “innovation” ETF holds, the top 5 stocks account for roughly 40% of the weighting and include Tesla (13%), Square (7.50%), Illumina (7.20%), Stratasys (6.50%), and Invitae (5.00%).
From a sector breakdown perspective, there’s a heck of a lot of Health Care and IT in this ETF, so it shouldn’t be surprising that it’s struggling as both sectors have seen relative strength wane and are finally getting hit on an absolute basis. No defensive sectors here to offset the weakness.
I could turn this into a more complicated post discussing individual components that look great on the short side, but when I dug in there I felt it was hard to define our risk in many instances. Just because they’re not shorts right now doesn’t mean they’re buys…they’re still in downtrends, but for now I think it’s best to keep this long-term thesis at the index level.
The bottom line is the ARKK/SPY ratio is confirming a major top and offering a market-neutral trading opportunity right now. If you’re a believer in buying smiley faces and selling frowny ones, this is a nice pitch.
Thanks for reading and please let us know if you have any questions!