Here’s why the Kospi Index is slumping today (July 2)

The Kospi Index slumped by over 7% as volatility in the South Korea’s equity market continued. It plunged to a low of 7,733, down by 17.50% from its highest point this year. 

Memory stocks drag the Kospi Index lower

The Kospi Composite Index remained on edge today as its recent volatility gained momentum. It has become common for the index to either jump or crash by double digits in the past few weeks. 

The ongoing retreat happened as top memory stocks like SK Hynix and Samsung dived. Samsung Electronics stock dropped by 5.56%, while SK Hynix fell by 7.30%. SK Square, which holds a large stake in SK Hynix, dropped by over 4%.

Memory stocks dived after reports said that Apple was lobbying the US government to allow it to buy chips made by Chinese companies. If this happens, it may open the door for other companies to start buying these chips, a move that will lead to more supply. 

Apple argues that allowing it to buy these chips will help it to keep its products more affordable. Just last week, the company confirmed that it was aiming to hike prices of its MacBooks, a move that raised concerns of demand destruction.

Memory stocks also dived after reports that Meta Platforms was considering entering the data center business. It aims to sell some of its spare capacity, raising concerns that the data center build up process was running out of steam. 

The stocks also fell after some PC makers launched a lawsuit in the United States, arguing that the companies conspired to boost memory prices. 

South Korean stocks face more risks

There are also concerns that South Korean stocks face several significant risks. For example, many South Korean investors have taken on substantial margin loans to amplify their stock market returns. 

A recent report showed that outstanding margin debt has climbed to more than $11 billion. Historically, highly leveraged positions tend to unwind rapidly when market sentiment shifts, increasing the risk of a sharp sell-off.

There is also a risk that the Kospi Index has jumped too quickly. In many cases, when an asset jumps this quickly, it attracts speculators, which then leads to a bearish reversal. 

The situation is more difficult for the index because its gains have been driven by two big names: Samsung and SK Hynix. A major issue in these companies tends to affect the broader index even when the other stocks are doing well.

Kospi Composite Index loses key support

Kospi Index chart | Source: TradingView

The daily chart shows that the Kospi Composite Index dropped below a crucial support level. It dropped below the lower side of the ascending channel, which connects the lowest swings since May 20th this year. 

The stock retreated below the 25-day moving average and the Strong Pivot Reverse level of the Murrey Math Lines tool. Therefore, the most likely scenario is where it continues falling, potentially to the key support level of 7,000, which coincides with the bottom of trading range. 

However, there is a likelihood that the index will experience some volatility in the coming days. As such, a return to the all-time high of 9,387 is still possible.