This correction was bound to happen. Such events are healthy in every market, but understanding the connection between crumbling AI stock prices and the recent margin unwind shows how bullish this is for long-term investors who can buy the dip.
Margin debt grew 53.7% year over year in May, reaching a record $1.42 trillion. It was also up by 8.5% month over month. All that margin meant that a small correction would inevitably turn into a big one — and it did.
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SK Hynix (NASDAQ: SKHY) is the poster child of this development. It dropped by more than 20% over the course of two days in July. But this dip has created a tremendous buying opportunity for long-term investors, especially when the margin unwind concludes.
SK Hynix is a memory maker that has benefited tremendously from the AI infrastructure build-out, but it is also a South Korean company. Not only that, but it is that country's most valuable company.
These are important details when assessing the current margin unwind. That's because 12 million South Korean retail traders received margin calls over the past week. That was more than 3% of South Korea's adult population.
That type of margin pressure can accelerate losses and margin calls for investors globally. Then, it creates a feedback loop that results in more margin calls and deeper corrections until the margin unwind is complete.
Since SK Hynix is its country's most valuable company and a major part of the AI trade, it has outsized exposure to the margin unwind.
Leveraged ETFs have made the margin unwind even worse, with these types of ETFs debuting for SK Hynix earlier this year. These ETFs must maintain fixed ratios of their holdings, so whenever an underlying stock loses value, they are forced to unwind some of their positions. If too many traders pile into leveraged ETFs while having margin accounts, it can trigger even more margin calls.
South Korea's Financial Supervisory Service Governor Lee Chan-jin called leveraged ETFs a "gambling operation" that has increased market volatility. "We are seeing a phenomenon in which ETFs themselves are driving market swings," he said.
The dramatic margin unwind in South Korea, fueled by margin loans and leveraged ETFs, has dragged SK Hynix well away from its all-time high. International investors have also been forced to sell some of their shares.
Source: Yahoo Finance Top News — This article was automatically imported from the source. Read full article at original source →
