Summary of Key Points
The recent sharp decline in the semiconductor sector is not an isolated event; it falls within the same pattern as the significant drops in gold and silver from January to February, and crude oil from March to June this year: a concentrated clearing of positions caused by "real narratives," momentum-driven buying, and leverage. By comparing the common patterns of these three market movements, the article analyzes the underlying reasons for the semiconductor sector's decline and provides criteria for future market trends (the extent of capital clearance and whether the narratives are validated). Finally, it offers three practical suggestions to individual investors.
I. The Essence of the Semiconductor Sector's Decline: It Follows the Same "Script" as Gold, Silver, and Crude Oil
The standard sequence of these market movements consists of three steps:
1. A Real Narrative Takes Off: The initial story behind the price movement is genuine—such as the "interest rate cuts for hedging" in the case of gold and silver, the "supply shortages due to strait closures" for crude oil, or the "surge in AI-related capital spending" in the semiconductor sector, all of which are supported by fundamental factors.
2. Momentum Funds and Leverage Come into Play: Investors see the upward trend and buy more, often using leverage, leading to increasingly large positions. For example, the peak long position exposure in U.S. leveraged ETFs on semiconductors reached $157 billion, and the balance of margin trading in the A-share market exceeded 3 trillion yuan. The financing cost for SK Hynix once exceeded the benchmark interest rate by 12%.
3. A Trigger Event Causes a Panic: An unexpected event disrupts the balance, turning a positive feedback loop into a negative one—such as Trump's nomination of a hawkish Fed chairman (shattering expectations of interest rate cuts) for gold and silver, the signing of an agreement between the U.S. and Iran (eliminating supply shortages) for crude oil, or Samsung's "all good news" becoming outdated (evening its record earnings but causing its stock price to fall). At this point, leveraged positions are forced to be closed, and momentum investors stop losing money, leading to a panic sell-off.
II. Three Unbreakable Rules of These Market Movements
1. A True Narrative Does Not Necessarily Mean Fair Prices: The story may be true, but prices can be driven to extreme levels by leverage and speculative buying. While the demand for chips in AI is real, the semiconductor index has risen far beyond its fundamental support, resulting in a sharp decline.
2. Gains Are Magnified When Prices Rise, Losses Are Amplified When They Fall: Leverage increases profits during gains but also exacerbates losses during declines. For instance, retail investors often use leverage when prices are rising, and exchanges require additional margin payments when prices fall, leading to a vicious cycle of forced closings and further price drops (silver experienced a 26% drop in one day).
3. You Can't Predict the Trigger Event, but You Can Recognize the Dangers: You may not know which factor will trigger the collapse, but having positions at historical extremes is a clear warning sign. Before each of the three declines, the leverage levels in gold, silver, crude oil, and semiconductors were already high—like a pile of gunpowder ready to explode with just a spark.
III. Will Semiconductors Continue to Fall? Look for Two Key Signals
To determine whether the market will recover, focus on two factors:
1. The Degree of Capital Clearance: Currently, institutional leverage levels are at the 96th percentile over the past five years (very high), and there are 1.2 million leveraged accounts in South Korea that may face margin calls this week, potentially leading to a concentrated wave of forced closings. However, there is also good news: SK Hynix's financing cost has dropped from +12% to +1.5%, indicating that leverage pressure is easing. While clearance will take time, it doesn't mean the market is bottomless.
2. Whether the Narrative Is Validated:
- The Kimi K3 Model: An open-source model with 2.8 trillion parameters released over the weekend, although not as advanced as OpenAI, has similar coding capabilities. It may be negative for U.S. tech giants but represents an "upgraded narrative" for China's AI ecosystem (which can develop models without relying on advanced chips). The effectiveness of this model will be confirmed by a technical report on July 27th.
- Financial Reports: While TSMC's earnings hit a record high, its stock price fell because positions were too concentrated. A "forecast-fulfilling" performance is actually negative for the market. In the future, investors will focus on two types of companies: those with strong narratives (such as Chinese AI applications and domestic computing power firms) and those with solid performance and lower leverage levels.
IV. What Should Individual Investors Do?
Here are three practical suggestions:
1. Distinguish Between Types of Profits:
- Profits derived from company performance (e.g., actual profit increases) can be held for a longer period.
- Profits based on market narratives (e.g., AI-related trends) should be monitored to see if the narrative is validated.
- Profits from market momentum (buying on dips and selling on highs) require being prepared to exit quickly; don't mistake such positions for "value investments."
2. Use Indicators of Market Congestion as a Warning Sign: Metrics like margin trading balances, leveraged ETF exposures, and financing costs can warn of potential dangers earlier than price charts. For example, when an article in May warned that the concentration of A-share transactions was approaching a warning level, the market continued to rise but later declined.
3. Don't Rush into a Recovery After Clearance: Wait for concrete validation of the narrative before attempting to buy into the sector. Pay attention to key events such as the Kimi model's report, the Politburo meeting at the end of the month, and tech giants' financial reports. Only when the narrative is confirmed will the market truly recover.
The core purpose of this article is to help you understand why prices have fallen and what to do next. It aims to teach you how to recognize the risks associated with crowded trading and avoid becoming a victim of panic selling. For individual investors, the most important thing is not to predict price movements but to learn to interpret market signals and maintain discipline.