US STOCKS OUTLOOK:
- U.S. stocks extend losses on Friday, with the tech and growth shares leading the sell-off
- U.S. Treasury yields push higher after the April U.S. Employment report surprises on the upside
- ARKK plunges more than 4% and hits its lowest level since April 2020
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U.S. stocks can’t stop the bleeding and are having another awful day on Friday, with traders reluctant to hold positions over the weekend for fear that the turbulence could worsen on Monday. In the early trade, all three major averages are sharply lower, but the Nasdaq 100 is leading the decline amid broad-based tech weakness.
Technology and growth companies are bearing the brunt of the sell-off as U.S. Treasury rates continue to charge higher. For instance, the 10-year yield briefly shot up to 3.12% earlier this morning, hitting its highest level since November 2018. The strong U.S. employment numbers appear to be the catalyst. Wall Street believes that the extremely tight labor market, coupled with the falling participation rate, will exacerbate upward pressure on inflation, prompting the Fed to reduce accommodation more forcefully in the future, a scenario that could trigger a hard landing for the U.S. economy.
Rising yields weigh on equities valuations by increasing the rate at which future cash flows are discounted, a conventional technique to price equities. This is very problematic for companies with little earnings and cash flows. For this reason, the poster child for the growth sector, the ARKK ETF, has been clobbered in recent months. The fund is down about 4% at the time of writing and more than 70% from its February 2021 high.
With inflation risks skewed to the upside, rising rates and the less benign macroeconomic environment for stocks, ARKK will struggle to recover and may even lose more ground as traders become more defensive and shun highly speculative assets.
In terms of technical analysis, ARKK has broken below a key support near the 50 level in recent days, an event that reinforced weakness. If the bears maintain control of the market, the fund could challenge the 40.00 zone in the coming days, the line in the sand so to speak. If this floor is breached on the downside, selling pressure could intensify, setting the stage for a retest of the 2020 pandemic low. On the flip side, if buyers return and spark a bullish reversal, resistance is seen around the 50 area, followed by 58.25 (see weekly chart).
ARKK WEEKLY CHART
ARKK Chart Prepared Using TradingView
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---Written by Diego Colman, Market Strategist
