TSLA - ARKQ: No Need To Rush For Your Buys (Technical Analysis)

Summary

• I believe ARK do a good company selection. But investors can best benefit from it if they take ownership of the macro considerations and invest only in favorable environments.
• Global capex spending may recover more slowly and this is a bigger trigger for fundamental bullishness on ARKQ.
• I am watching the monthly PMIs in major economies to ascertain readiness for large scale capex spends.
• Technical analysis suggests that a bottom may be hit, but it would still take some time for meaningful price appreciation. To maximize IRR, it would be more prudent to invest elsewhere and reconsider ARKQ in a few months' time.

Introduction

A few days ago, I analyzed ARK's Genomic ETF (ARKG). I think ARK Invest do good work on specialized research focusing on long term transformation potentials of companies. Hence, their ETFs are indeed a bunch of highly promising companies with very asymmetric risk-reward profiles.

I believe the best way to profit from these ETFs is to take our own ownership of the macro considerations to invest only in favorable environments. When the global economic environment is up-beat, I believe ARK Invest's funds will outperform the market handsomely.

In this article, I explore the prospects of another one of Ark's innovation themes:

ARKQ: Exposure to Autonomous Technology & Robotics

The ARK Autonomous Technology & Robotics ETF ( ARKQ ) seeks exposure global companies whose primary business is in selling competencies in areas such as autonomous transportation, robotics and automation, 3D printing, energy storage and space exploration.

ARKQ ETF Exposure Mix

Diversified Sector Mix

I would say ARKQ has a broad sectoral exposure overall, particularly in industries that combine the use of technology with hardware. One noteworthy difference I spot is the stark difference in weights in the producer manufacturing industry (19% weight) and the process industries such as chemicals (0.6%). This illustrates ARKQ's exposure to technology spend associated with discrete, device-related components. This is in contrast to technology spends associated with software to control the flow of processes such as fluids and gases.

Most Companies in North America but Diverse End Markets

The chart above shows that many of the companies in ARKQ are in North America. However, it is important to note that the revenue profile would be much diversified. For example, I suspect that Western Europe, which has many automotive companies would make up more than 1% of revenue exposure.

Diversified Top 5 Holdings Mix

ARKQ's top 5 holdings include Trimble ( TRMB ), Kratos Defense & Security ( KTOS ), Iridium Communications ( IRDM ), Tesla ( TSLA ), and UiPath ( PATH ).

Given the sector specialist focus of the ETF, I believe this is quite a diversified exposure with the top 5 making up 37.6% of the entire portfolio. Moreover, the weights are less asymmetrical than is the case in some of ARK Invest's ETFs such as Genomics ( ARKG ).

Fundamental Drivers of ARKQ

The diversified nature of ARQ means no individual stock contributes disproportionately to the overall performance of the ETF. Rather, it is more useful to consider the underlying drivers of customer spends:

I note that autonomous transportation, robotics and automation, 3D printing, energy storage and space exploration solutions are often capex-spend decisions as opposed to opex spend decisions. Some industry commentaries suggest a preference for opex-related spends, with capex spends expected to recover more slowly. This would be a headwind for companies in ARKQ, holding potential room for downward surprise in sales.

I believe capex spends will be more active during times of buoyant industrial activity. To that extent, I note that a large part of global industrial activity in the United States, China and Japan (which make up almost 50% of GDP) is in contraction mode. Until these countries' respective PMIs float above the 50-line again, I doubt there would be any genuine trigger for bullishness in ARKQ's constituent holdings.

Technical Analysis

Relative Read of ARKQ vs. S&P 500

Against the S&P500 ( SPY ), ARKQ has had it rough since it exploded to its peak in February 2021, followed by a sharp bearish drop to date. However, the ARKQ/SPX500 pair might have reached its bottom after returning to the critical monthly support level, as highlighted in the chart above.

I expect a slowdown in momentum around this level and a steady sideways pattern along the monthly resistance and support zones to determine the directional momentum that follows. My study of financial market bubbles suggests that recoveries after a bubble pop such as here tend to be slow and gradual rather than sharp. To confirm a change in trend, I must see a clear false breakdown and a sharp rebound, trapping sellers and early buyers.

Standalone Read of ARKQ

On the standalone chart, I anticipate a similar price pattern with ranging price action. However, in this case, I think ARKQ is likely to have a visit down to the $35.38 monthly support, as this support level has more historical relevance.

Takeaway

If capex spends take longer to rebound, then a fundamental bullish case for ARKQ may not materialize so soon. I am tracking industry commentaries and the global economy's PMIs as a proxy to assess the underlying spending environment.

However, this does not mean the bleeding down of the ETF price will continue. Rather, I think we are forming a bit of a local bottom and I expect a slow and gradual build-up of an accumulation base before any material move upwards. To maximize IRR, I believe it is best to wait a few months and buy again at similar prices.

Thus, my overall assessment is a 'hold' on ARKQ.

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