From the desk of Willie Delwiche.
Key Takeaway: A sentiment unwind can be constructive if it bends but doesn’t break. That is, if volatility squeezes out some excessive optimism without ushering in pessimism. On the other hand, when it breaks it becomes like water through a dam, creating a messy and, at times, chaotic environment. So far the unwind from the speculative extremes of early 2021 has been orderly and has not broken through. But pressure is building and the dam must hold if we want to still talk about rotational churning and not move on to discussing sustained cyclical weakness. That’s the challenge for 2022.
One of the superstars during the recent bout of speculative fervor, the ARK Innovation ETF ARKK, now struggles to stay afloat. It’s meteoric rise and subsequent decline have been dramatic with a 380% run up off the March ‘20 lows followed by a 50% decline from its peak. ARKK’s recent breakdown is a great example of the speculative unwind we’re seeing as Nasdaq trading volume dwindles. Continued weakness from this former leader could act as fuel for expanding pessimism.