The S&P 500 was down 3.8% on Monday only to reverse, closing up by 0.3%. The Nasdaq was down 4.9% intraday and closed up 0.63%. Talk about whiplash!

We haven’t seen an intraday reversal like that since the financial crisis in 2008. And that’s just the tip of the iceberg.

It’s a nerve-wracking time to be in the markets, but my mantra is all the same: Buy the dip.

Because as scary as this moment may seem, consider this: The Dow made another all-time high just three weeks ago. And no, there hasn’t been any trend reversal since then, we haven’t fallen into a recession, and interest rates haven’t gone through the roof.

Investors are just afraid all that could happen. And because of it, they’ve created a wonderful opportunity.

That said, you have to take a targeted approach here. Retail’s usual “buy anything and everything” mentality isn’t going to work – because this dip is different.

I’m working double-time to ensure you have the stocks to withstand this market pullback, and I’ve got a great place to start looking…

Ready, Aim, and…

This morning, your target is Cathie Wood’s ARK Invest Funds.

The flagship ARK Innovation ETF (NYSE: ARKK) and the others have intrigued the trader in me since they were founded in 2014. Most of the stocks Wood puts into her active ETFs are “hot list” names – companies in the news – followed by hedge funds and retail traders and investors.

Because of the widespread coverage those names have gotten, from the financial media to retail trader chat rooms and market “influencers,” they’ve enjoyed a solid upward momentum.

But a good look into the portfolios underlying the ARK active ETFs reveals a couple of interesting “tells.”

One is the fact that ARK funds are stuffed with too many unprofitable companies that are hot on futuristic promises and hype – fluffed-up stocks that momentum chasers go after. This works for everyone on the upside when interest rates are low and folks drunk on a bullish mentality rush after every disruption narrative they see.

(Think early pandemic, just as retail trading picked up steam and shook up the paradigm.)

At times, as many as one-third of the companies in some ARK funds are unprofitable, sporting high promises and low earnings, despite their status as media favorites. Past the hype, it’s not a good look.

The other “tell” is this: ARK is responsible for 5% to 10% of average trading volume on any day the funds see large inflows of new investor capital.

Over the past three years, ARK has been responsible for about 2% of the average daily volume in many of the names it owns. This certainly works in its favor, momentum-wise, in an up-trending market when ARK managers have to buy shares of all the underlying stocks that make up their portfolios.

It worked for the ARK Innovation ETF, which on some heady days early last year saw daily inflows of more than $1 billion. The fund took a ride to new heights in 2020, climbing up by 148% into early 2021.

Then the trouble started.

But only for ARK. For us, it’s a hole-in-one opportunity.

These Are the Dips You’re Looking For

Those “tells” I mentioned only worked on ARKs behalf on the way up. In shakier times, these strategies should work against the funds and their underlying names all the way down.

Sure enough, now we’re seeing it happen.

ARK Innovation is down close to 58% from its 52-week highs, and down 22% year to date in 2022. As the price of ARKK falls and investors sell shares, all the stocks underlying the portfolio have to be sold as units are destroyed.

That spells opportunity. The sell-off has helped knock down some great stocks, down to the discount row you’d expect to find in Filene’s Basement, if those old brick and mortar stores were still open.

Within ARKK’s top 10 holdings, you’ll find Roku Inc. (NASDAQ: ROKU) is down almost 70%, Zoom Video Communications Inc. (NASDAQ: ZM) is down about 67%, and Shopify Inc. (NYSE: SHOP) is down 50%.

Now is the time to grab all three of these.

They’re solid companies with huge revenue and great profit margins, especially the 81% profit margin at Shopify. All are very profitable and sitting on lots of cash relative to easily manageable debt loads, including Zoom’s tiny $98 million in debt.

And are all on sale.

The reason you want to buy these stocks when markets are scary is because they’re stalwart, must-own names. They will always rise with the tide and do so a lot faster than the rest of the boats racing back out to catch big profits. I’ve written about each of them in the past, and my confidence in them remains solid.

— Shah Gilani

Source: Money Morning