The pandemic created shifts in technology and consumer behavior that are still echoing today. In 2020, the spotlight shined brightest on newer tech companies like Zoom Video Communications and Teladoc Health.
Cathie Wood and her team at ARK Invest were big buyers of these names. The ARK Innovation ETF was the talk of Wall Street in 2020, gaining a spectacular 152%. Wood became a celebrity, thanks to her frequent media appearances and the transparency of her company’s trading strategies.
Then it all fell apart. ARKK lost 23% in 2021, and then 67% in 2022. The steadfast trading style that performed so well proved to be a double-edged sword.
One of Wood’s largest positions today is Palantir. The stock has been called a pure play on artificial intelligence. Ark Invest recently added 1.58 million shares.
Should we buy Palantir? The stock’s chart says no.
Palantir reached a one-month low this week, falling on above-average volume (arrows). After a gap higher on November 2, the stock formed a small head-and-shoulders pattern (shaded yellow). While Palantir remains above its 200-day moving average (red), the stock has slipped below its 50-day moving average (blue) for the first time since November 1.
My concern with Palantir is the fading popularity of AI stocks in general. The stock has gained some 168% this year, but has fallen by 19% since November 20.
Other stocks associated with AI are also pulling back. C3.ai Inc. has gained 132% this year, but the stock fell by 10.6% on Thursday, and closed at its lowest price in over a month. The stock trades below its key moving averages and appears to have lost momentum.
Symbotic Inc. , which has gained over 300% this year, has a chart similar to Palantir. The difference is Symbiotic’s bearish pattern has taken the form of a rounded top (shaded yellow). Like Palantir, Symbiotic’s pattern formed after a gap higher.
Every so often, one sector takes off due to excitement, or a great story, or both. Eventually, the excitement wears off, the momentum fades, and investors are drawn to the next exciting story.
AI has an amazing future. It’s the biggest tech story of the year, and could be the biggest tech story of the next 10 years. But there’s a danger of getting drawn in after an incredible run.
If you’re already holding AI stocks, the danger is in holding on too long. That was the fatal flaw in Wood’s strategy. Momentum stocks are amazing, until they lose their momentum.
Head of Trading Dimitar Kalapov