Could ARKK Sink The Market?

Hey Traders,

There is a lot going on out there …

But in spite of omicron …

In spite of inflation and the Fed …

I think the most recent market turbulence can be largely attributed to one name in particular …

ARK Innovation ETF (Ticker: ARKK).

The ETF has been making headlines for weeks … and for good reason.

ARKK’s problems pre-date the omicron sell-off …

And could create huge problems for the market if the ETF can’t find a bottom.

Here’s what’s going on.

ARKK Has A Redemption Problem

Rather than the broad market headwinds, ARKK’s biggest problem right now is redemption.

Essentially, redemption means that ARKK’s long-term holders are looking to cash out of the ETF.

However, without adequate liquid funds to pay for all these redemptions, ARKK is being forced to sell off some of its investments to come up with the cash.

The result?

ARKK’s biggest holdings – names like Tesla (Ticker: TSLA), Teladoc Health (Ticker: TDOC), Coinbase Global (Ticker: COIN), Palantir Technologies (Ticker: PLTR), and DraftKings (Ticker: DKNG), just to name a few – are suddenly seeing massive selling action, pressuring share prices lower.

Of course, that means ARKK itself also moves lower …

Which encourages even more ARKK holders to want out.

It creates a cycle, where ARKK must sell its holdings to pay off investors, and the selling tanks its holdings, which in turn tanks ARKK, which means more people want out.

Want to see what I mean?

Take a look at this three-month chart of ARKK: 

On November 10th, which just so happens to be when news broke about Elon Musk selling nearly $1 billion worth of TSLA stock (a number that has now ballooned to $10 billion) – ARKK gapped lower, and wasn’t able to make up much ground in the days that followed.

As TSLA dropped …

ARKK was pressured lower, and thus this deadly cycle began.

Now, to be sure, many ARKK components were trending lower prior to when this sell-off began.

But the ARKK redemption is certainly adding fuel to the fire, and making it difficult for these names to catch a bid.

Add in the broad market headwinds and volatility we’ve seen since the Black Friday omicron sell-off …

And you’ve got a recipe for disaster.

For PLTR in particular, a negative earnings reaction on November 8 just served to compound PLTR’s problems even further.

And PLTR isn’t the only stock that was stumbling before ARKK’s redemption troubles began …

After all, the ETF has definitely made some questionable – if not outright bad – choices in its investments.

So what’s next?

Will the whole ETF spiral out of control, tanking the market as it does?

Maybe.

After all, take a look at the current VIX:

Right now, a VIX this high means the S&P 500 (Ticker: SPX) should be moving 2% per day.

But that is simply not happening.

Yes, the S&P 500 is down …

But it’s only really off about 100 points since November 18!

However, certain sectors of the market are seeing massive moves …

And while I won’t say it is solely ARKK holdings that are dropping …

They certainly are a very large part of the problem.

(Mega caps are also contributing to the problem, but that’s another story in and of itself.)

Now, Monday did see ARKK catch a bid, along with much of the rest of the market.

Has it finally found a bottom?

Can Cathie Woods breathe easy again?

It’s possible. We will have to wait and see …

But personally, I wouldn’t relax just yet.

Your Only Option,

Mark Sebastian

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