Recently, a dramatic stock market scenario played out in South Korea.
A battery material manufacturing company saw its share prices soar to record highs, only to plummet 30% within the span of an hour. This intense volatility, more thrilling than a rollercoaster ride, piled tremendous psychological pressure on the retail investors behind the scenes.
EcoPro Hits Record Highs Sparking Retail Panic
On Wednesday, July 26, South Korean battery material manufacturing giant, EcoPro, continued its ascent until it hit a record high of 1.539 million KRW by around 1 p.m.
However, less than 60 minutes later, the surge had all but evaporated.
By 1:30 p.m., EcoPro's share prices took a nosedive, dropping to 1.136 million KRW at one point-a near 30% plunge from the record high just set.
After opening the next day, EcoPro continued its descent, finally closing at 985,000 KRW. Over the course of July 26 and 27, EcoPro saw a near 20% drop in its share prices.
Experts within the industry believe that EcoPro's sudden price drop resulted from massive sell-offs by retail investors, not specific external factors.
Data from the Korean Exchange revealed that between June 24 and 28, retail investors sold off EcoPro shares and EcoPro BM (a subsidiary) shares worth 629.5 billion KRW and 739.2 billion KRW, respectively.
Within the Kosdaq Index, these two stocks topped the list of net sell-offs by retail investors.
It's speculated that when EcoPro share prices breached the 1.5 million KRW threshold, retail investors saw this price as a technical high and began a sell-off chain reaction to cash in, ultimately leading to a price crash.
The fear of margin calls could also have contributed to the price drop. A margin call is when brokers force the sale of shares bought with borrowed money when their value falls below a certain level.
So far this year, EcoPro has surged by 1000%, while EcoPro BM has risen by 350%. Market observers have warned that these uptrends might already exceed the support of underlying fundamentals.
A Goldman Sachs analyst also warned last month that the global cathode market might face an oversupply in the next decade and suggested investors offload their EcoPro BM shares.
Despite the improving revenues in this hot industry, even if South Korean battery manufacturers manage to capture a share of the Chinese market, a bubble might still be forming.
Meanwhile, larger investors have increased short positions, betting on a stock decline. According to data from the Korean Exchange, by mid-July, short positions in EcoPro had soared from 54 billion KRW at the start of the year to 1.3 trillion KRW.
Nevertheless, Korean retail investors, who liken themselves to "ants" with the belief that there's strength in numbers, continue to purchase stocks. They disregarded warnings of overvaluation from well-known YouTubers like Park Soon-hyuk, a former chemical company executive dubbed "Battery Man," and kept buying EcoPro shares, pushing them to historic highs.
According to Can Lee, a partner at Petra Capital Management, both EcoPro and EcoPro BM are classic "meme stocks," and their prices are too high even considering their future growth potential.
However, this sharp decline triggered another buying spree among retail investors as they attempt to seize the opportunity to profit from battery material stocks, viewing this as a chance to buy related stocks at prices lower than Wednesday's peak.
After last week's volatility, EcoPro's share price has already rebounded this week, slightly increasing by 0.08% on Tuesday.
Retail investors are wagering that South Korean battery manufacturers and material producers will benefit from the booming electric vehicle market and the Biden administration's subsidy plan for clean energy.
Don't Underestimate the "Ant" Traders
The intense fluctuations in the share prices of this battery material manufacturer have raised alerts about the influence of these "ant" traders-retail investors.
Their massive sway can dictate the trends in the Korean stock market, akin to the impact of retail investors on "meme stocks" in the US.
Their bets on electric vehicle-related stocks triggered volatile swings, driving the Korean stock price index, the Kosdaq 150, to a five-year high last week, only to rapidly crash afterwards.
These stock price fluctuations serve as a reminder not to underestimate the impact of retail investors-their stock bets could yield dizzying gains, or they could suffer painful losses.
Local brokers have been hesitant to release new reports about battery material stocks after some analysts faced complaints from retail investors for issuing "sell" reports on EcoPro shares.
Additionally, investor sentiment, rather than fundamentals, has been influencing the volatility in battery material stocks. As Samsung Securities analyst Shin Seung-jin explained:
While certain major stocks have always led the market and investor fervor for specific sectors isn't unusual, the stock movement in July was exceptionally volatile.
In this era, investor sentiment and algorithmic trading supply and demand are more important than fundamentals. Stocks that have risen due to growth expectations will continue to see increased volatility.
