South Korea’s Kospi Composite Index slipped by nearly 2% on Monday morning, driven by the sell-off in SK Hynix and Samsung, rising crude oil prices amid the ongoing US-Iran crisis, and fears of single-stock ETFs. It retreated to 8,255 points, a few points below the year-to-date high of 9,387.
Samsung, SK Hynix stocks retreat amid leveraged ETFs woes
The Kospi Index has come under intense pressure in the past few days as investors have remained worried about the artificial intelligence (AI) boom.
These worries have pushed key stocks like Samsung and SK Hynix, which account for over 50% of the index, downwards.
The two stocks initially pumped after the strong Micron earningslast week as they showed that demand for memory remained at an elevated level. Its revenue surged by triple digits, while its gross margin crossed the 80% level.
The situation changed a day later when Apple announced that it would hike prices of its MacBooks because of the rising memory prices. Before that, Apple said that it would hike prices of its iPhones, raising concerns about demand destruction.
There are also concerns about whether the AI boom will last or whether it will reverse as we saw during the dot-com era. Indeed, the South Korean market is exhibiting some of the behaviors that we saw during the dot-com and the housing market bubble era.
For example, most people in South Korea have rushed to the stock market because of the Fear of Missing Out (FOMO). Many people are also borrowing heavily to invest in the stock market. Data shows that individuals have borrowed over $11 billion, up by over 70% from December last year. In most cases, periods of such irrational exuberance rarely end well.
Meanwhile, investors have piled into the recently approved leveraged single-stock ETFs. These funds, which require investors to complete hours of instructional training and pass an eight-question exam, have attracted millions of dollars in assets this year.
While they can generate outsized returns when the underlying stock performs well, they can also lead to substantial losses during market reversals, as both gains and losses are magnified.
The Kospi Index is also retreating as investors react to the latest developments in the crude oil market. Both Brent and West Texas Intermediate (WTI) crude prices rose by more than 1% on Monday after tensions between the United States and Iran escalated. The two countries exchanged fire over the weekend, with each accusing the other of violating the ceasefire.
Kospi Index technical analysis
The daily chart shows that the Kospi Composite Index peaked at 9,387 earlier this month and then dropped to 8,276 today. It has now retested the lower side of the ascending channel shown in black.
The index has remained above the 50-day Exponential Moving Average (EMA), while the two lines of the MACD indicator have made a bearish crossover and are pointing downwards.
Therefore, the index will likely maintain its volatility in the coming days. In this case, it may rebound as bulls target the upper side of the channel. Alternatively, the index may continue falling, a move that will be confirmed if it drops below the lower side of the channel and the 50-day moving average.