Hidden Margin Debt Danger

Please click here for an enalrged chart of SanDisk Corp (NASDAQ:SNDK).

Note the following:

  • Sandisk (SNDK) is important because it has been a leading stock due to explosive NAND memory demand for AI. Sandisk also has been one of the momo crowd’s favorite stocks.
  • The chart shows SNDK stock rose rapidly until June 2026.
  • The chart shows that SNDK dropped 57% from high to low.
  • The chart shows that SNDK stock also rallied over the last few days when a huge stock market rally was triggered by the collapse of the $45B Situational Awareness Fund, which lost 67% in July.
  • The chart shows that SNDK stock has dropped again after reporting earnings.
  • To build the foundation, the history of SNDK is in order: SNDK was spun off from disk drive maker Western Digital Corp (NASDAQ:WDC) on February 21 2025. On February 21 2025, WDC stock closed at $51.93, and SNDK closed at $50.37 on a when-issued basis. On April 7 2025, intraday SNDK stock fell to $27.89.  Since then, WDC stock has traded as high as $799.87 on June 18 2026, and SNDK stock has traded as high as $2354.39 on June 22 2026.  WDC stock has also been a leading stock, just like SNDK.
  • SNDK earnings disappointed; here are the details:
    • SNDK reported Q4 EPS of $39.25 vs consensus $34.51 and whisper number of about $38.
    • SNDK reported Q4 revenue of  $8.97 B vs consensus $8.39B and whisper number of about $9B.
    • SNDK projects Q1 EPS of $44 – $46 vs consensus of $44.21 and whisper number of about $50.
    • SNDK sees Q1 revenue of $10.3B – $10.8B vs consensus of $10.62B.
  • Here is the most important point for investors: SNDK stock traded as low as $27.89 not that long ago, and now for the next quarter SNDK is projecting EPS of $44 – $46. In little over a year from the low, SNDK is earning in one quarter more than the entire value of the company at the low.
  • Just like SNDK, WDC also reported great earnings and great growth but still disappointed high expectations, here are the details:
    • WDC reported EPS $3.56 vs consensus of $3.23
    • WDC reported Q4 revenue of $3.75 B vs consensus of $3.7B
    • WDC projects Q1 EPS of $3.85 – $4.15 vs $3.77 consensus.
    • WDC sees Q1 revenue $4B – $4.2B vs $4.04B consensus.
  • So far in the early trading, the stock market is not focusing on massive earnings growth at disk drive manufacturer WDC and NAND memory manufacturer SNDK, and insatiable demand for memory and disk drives for AI.  The market is focusing on WDC and SNDK missing whisper numbers. SNDK is being punished with a drop of 10.38% and WDC with a drop of 14.48% in the premarket.
  • We have repeatedly warned when these stocks were trading near the highs that, due to a number of factors, these stocks were likely to drop.
  • In our analysis, here is an important observation that every AI investor needs to pay attention to. Apple Inc (NASDAQ:AAPL) is a big NAND user. AAPL stock is trading at a forward P/E of about 34.1, but SNDK stock is trading at a forward P/E of 5.65 based on the price drop this morning.  There is a huge dichotomy here. How this dichotomy is resolved will have a significant impact on the stock market.  Most investors are missing the point — there can easily be 30% – 50% upside or downside in this market.  The determining factor will be if AI-driven growth turns out to be secular or cyclical.
  • Given that 30% – 50% moves can occur in the stock market in the coming years in either direction, it is easy for the momo crowd.  The reason is the momo crowd focuses only on the upside and stays oblivious to the downside, but for prudent investors who understand that risk and reward are two sides of the same coin, the potential large moves are difficult to handle. 
  • In addition to the uncertainty about AI-driven earnings, prudent investors should also pay attention to margin debt and market structure issues.
    • Regarding market structure, we have been sharing with you that lately the US market, especially semiconductor trade, has been following the South Korean stock market; prior to this shift, historically the South Korean market followed the US market.  The South Korean market these days is primarily driven by two memory manufacturers, SK Hynix Inc – ADR (NASDAQ:SKHY) and Samsung Electronics Co Ltd (OTCPK:SSNLF).  
  • In our analysis, the South Korean market is simply not big enough and also does not have the market structure to accommodate the two giant memory manufacturers and in turn volatility is carrying over into the U.S. stock market.  Of special note is that overnight SK Hynix stock fell 30% in a flash crash in South Korea on the NextTrade exchange.
  • In our analysis, another danger that mainstream media is oblivious to is hidden margin debt. Now, the world’s smartest banker, Jamie Dimon, CEO of JPMorgan Chase & Co (NYSE:JPM) is warning that hidden margin debt is very high and poses danger.
  • Jobless claims came at 199K vs 200K consensus. 

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis. 

In the early trade, money flows are positive in NVIDIA Corp (NASDAQ:NVDA).

In the early trade, money flows are neutral in Meta Platforms Inc (NASDAQ:META) and Apple (AAPL).

In the early trade, money flows are negative in Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc Class C (NASDAQ:GOOG), Microsoft Corp (NASDAQ:MSFT), and Tesla Inc (NASDAQ:TSLA).

In the early trade, money flows are negative in SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust Series 1 (NASDAQ:QQQ).

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust (GLD).  The most popular ETF for silver is iShares Silver Trust (SLV).  The most popular ETF for oil is United States Oil ETF (USO).

Bitcoin

Bitcoin (CRYPTO:BTC) is seeing light selling.

What To Do Now

Consider continuing to hold good, very long term, existing positions and add tactical positions based on signals.

The Arora Report is known for its accurate calls. The Arora Report correctly called the big artificial intelligence rally before anyone else, the new bull market of 2023, the bear market of 2022, new stock market highs right after the virus low in 2020, the virus drop in 2020, the DJIA rally to 30,000 when it was trading at 16,000, the start of a mega bull market in 2009, and the financial crash of 2008. Please click here to sign up for a free forever Generate Wealth Newsletter.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.