Kospi Index jumps as Samsung, SK Hynix lead, but beware of key risks

South Korea’s Kospi Index jumped by over 4% on Friday, capping a highly volatile week that saw it plunge to 7,060, its lowest level since May 20. It remains in a local bear market after falling by 20% from its highest point this year.

Samsung and SK Hynix jumps

The main driver for the ongoing Kospi Index rebound is that the two biggest constituents are rising today. Samsung stock jumped by 6.29%, while SK Hynix and SK Square rose by 2.8% and 7.3%, respectively. 

These stocks have rebounded as investors move back to memory companies. On Thursday, top players like Micron, Sandisk, and Western Digital continued their recovery.

SK Hynix is soaring ahead of its ADR listing in the US today, which is said to be highly subscribed. It has raised $26.5 billion from American investors in the biggest foreign debut in the US. The fundraising was seven times subscribed, a sign of rising demand from investors.

Still, this offering may pose a risk to SK Hynix as we have seen with SpaceX. SpaceX IPO was equally oversubscribed, which helped push its stock to a record high. This week, however, the stock closed below its IPO price, mirroring what other companies go through after their IPO. 

In most cases, their stocks jump initially as the hype builds, and then retreats after a few days or weeks. This has happened to companies like Circle Internet, Gemini Space Station, and Figma. A pullback of SK Hynix’s ADR will likely lead to a similar retreat in its South Korean shares.

Other large South Korean stocks were also in the green today. Samsung Electro-Mechanics stock jumped by 6.36%, while Hyundai Motor, LG Energy, Samsung Biologics, and Samsung Life Insurance rose by over 5%.

South Korean stocks face major risks

The ongoing volatility in the Kospi is happening at a time when South Korean stocks are facing major risks. One of these risks is that the rally has largely been driven by two companies that are in one industry. As such, while the index will rally if these stocks continue thriving, there is a risk that it will drop when the music stops.

There is also a risk of what is happening in the Middle East, where fighting between the US and Iran has resumed. Trump has declared the ceasefire over, raising the possibility of an escalation. Such a move will lead to higher oil prices, affecting the South Korean economy.

Further, there are signs that foreign investors have been selling their South Korean shares. Data shows that these investors sold shares worth $12.6 billion in South Korea in June, a sign that it has moved to a distribution phase.

There is also the leverage risk as South Koreans have taken huge loans to invest in the stock market. In most cases, leveraged positions are closed faster during downtrends, which may accelerate the sell-off.

Technical analysis suggests that a Kospi Index retreat is possible

As we have warned before, the Kospi Index has been in the markup phase of the Wyckoff Theory. The accumulation phase existed in several months before the rally started.

There is a risk that the ongoing volatility is because it has entered the distribution phase, which is then followed by the markdown stage. This markdown may accelerate as investors close their leveraged positions.

The index remains below the lower side of the ascending channel and has moved below the 50-day moving average. Therefore, there is a risk that it will resume its downtrend in the near term.