The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Chips
Chipmaking fears sprouted up in Asia, specifically Korea, and panic ensued. The KOSPI fell 10%. Europe fell more than a percent, as did we. The worry about chipmaker stocks is rooted in AI and the possibility that it was a bubble after all and that now the bubble is popping. Tech stocks were broadly sold and the S&P 500 showed its sensitivity to the megacap tech names. Interestingly advancers to decliners in that index was 1.3 to 1. The S&P opened down about 110, clawed back 60 points, and then leaked away most of that recovery over the session. The US stock market certainly did not panic and dip-buyers showed their presence even though they couldn’t turn the tide. Yields fell small across the curve, in keeping with a significant risk-off move. Crude didn’t move much, supporting the narrative that today’s risk-off efforts were not related to US/Iran drama.
I wonder if today was the inevitable AI-related selloff that we’ve all been waiting for. The drop is not linked to a bombshell change in fundamentals but a pointed change in sentiment. The massive amounts of leverage used in the Korean stock market appears to have made that market very sensitive and they may have just experienced a widespread margin call. Over-levered investors were certainly forced out today. It remains to be seen whether this was a one-and-done washout or if this process will continue.
I think there’s probably more to come. The Korean market was halted today as its circuit breaker was triggered. It is likely that many positions still need to be forced close. I think that US and European markets will drop in sympathy as long as this deleveraging process continues.
The larger risk to US stocks is if the sympathy de-risking triggers the margin clerks into action over here. I think that’s unlikely at the moment but that is a material downside risk.
See you tomorrow.
-Mike
Visdom Market Commentary
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