Interest rates

ARKK at Risk as Fed Pivots to Higher Interest Rate Regime: Top Trade Q1 2022

The Federal Reserve made a very clear statement at the end of its December meeting: labor market. At that meeting, the FOMC doubled the pace of its reduction to $ 30 billion per month, a move that will see the asset purchase program wrap up in March, three months ahead of schedule. At the event, policymakers also signaled they could increase the federal funds rate three times in 2022 to counter the elevated price pressures, a much more aggressive normalization schedule than envisioned in September, when the dotted median expectations only indicated a half-rise.

Although stocks initially rose despite the warmongering pivot, it is unlikely that widespread bullish sentiment will prevail in early 2022, a situation that could pave the way for pockets of weakness in the equity market. TSalvationIt may be a good time to consider some trading strategies that capitalize on a potential pullback in risky assets.

First, I want to start by saying that I am not calling for a wide clearance sale. As the move to a higher rates regime is clearly a headwind, stocks are not established equal. Based on this premise, it can be argued that some businesses will feel the pinch of less hosting more than others.

In my opinion, technology, but more importantly, growth stocks with sky-high multiples and unprofitable businesses will lose the most from the shift to a less stimulating environment. Conversely, value-driven companies with strong balance sheets and growing margins may be the least affected.

With the speculative corner of the market in jeopardy, I think the ARK Innovation FNB (ARKK) is in a very precarious situation and, therefore, subject to a sharp drop in the coming months. ARKK is made up of innovative, long-term growth companies with little or no income, which are very sensitive to expectations of rate hikes as their value relies primarily on future earnings. As the Fed’s take-off draws near and investors reassess valuations, ARKK’s holdings could suffer, pushing the price of the ETF down.

For this reason, I am inclined to bet against ARKK in the first quarter of 2022. There are many ways to create a bearish position in an underlying, from a direct short position to derivatives to limit the downside. Focusing on the options market, a bear put spread for a net flow is often used to play a bearish thesis because the strategy allows traders to define their risk from the start while reducing the premium paid to set up the trade (buying a standalone put will be more expensive than a bearish put spread, even more when volatility is high).

Focusing on technical analysis, I wouldn’t go into trading all the time, no! After all, I want the odds to be in my favor. Having said that, I would personally expect a rebound and only step in if ARKK hits a certain level of resistance. Visual inspection of the daily chart shows that the first major resistance is appearing near the psychological bar at 104.00. Another key, and possibly more significant, resistance can be seen in the 125.75 area, although price may not get there for some time if asking interest picks up early in the news. year.

In case of an outsized size sell-off, the first support to consider can be found at Band 90/89 (at time of writing). If this floor is violated decisively, the 61.8% Fibonacci of the 2020-2021 rally, close to 81.26, could become the next downside focus before the region of 60 comes into play.


ARKK chart prepared in TradingView

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