Kospi Index is in a bear market: is the South Korean party over?

The Kospi Index has retreated into a technical bear market after falling by 23% from its highest point this year. This sell-off continued today as it plunged to its lowest level since May 20th. So, will the blue-chip index fall further, or will it stage a comeback?

Why the Kospi Index has plunged

The Kospi Index, which tracks the biggest companies in South Korea, has been the best gainers globally since last year. It jumped from 2,268 at its lowest level in April last year and peaked at a record high of 9,387.

The rally was caused by government policies that encouraged stock investments, with the president predicting that the Kospi would jump to 5,000.

These policies coincided with an artificial intelligence boom that led to a surge in demand for memory products and semiconductors. Samsung and SK Hynix are some of the biggest players in these industries. 

The demand led to substantially higher prices, revenues, and profits for these companies. Just this week, Samsung said that its revenue more than doubled in the second quarter, with management predicting more growth ahead.

Samsung and SK Hynix joined their global peers in the memory industry in soaring, with their market capitalization rising to over $1 trillion. As this happened, South Korean and foreign investors embraced Fear of Missing Out (FOMO). 

Many South Koreans took loans to take part in the bull market, with recent data showing that leveraged trades had soared in the country. Leveraged stock investments by retail investors soared to their limits a while ago, making it difficult for these investors to borrow more.

Recently, however, the party has started to stall. Foreign investors have continued selling South Korean stocks because of profit-taking. At the same time, Samsung and SK Hynix, which led the gains, have tumbled as investors question whether they have more room to grow.

A key concern is that memory prices may start to retreat in the coming months since this industry is highly cyclical. Investors still remember what happened in 2023 when revenues of most memory companies plunged by double digits.

At the same time, there is a risk that the US-Iran war will restart soon. In a statement, Donald Trump said that, in his view, the ceasefire had ended. The US launched strikes against Iran overnight, with the latter retaliating. Oil prices have started going up again as traders map the potential scenarios. 

What next for the Kospi?

A traditional theory known as Wyckoff provides a good explanation for what is happening with the Kospi Index. It explains that assets go through four main cycles over time. The first one is the accumulation, where assets move horizontally. It is then followed by the markup phase, where prices move parabolically as FOMO intensifies.

This stage is then followed by distribution and then markdown, where investors start panic selling. There are signs that we are now in the markdown phase, which may trigger more selling, especially by leveraged retail investors.

The index is also likely going through mean reversion, where assets fall and move back to their historical averages. In this case, Kospi is at 7,204, while the 200-day moving average is at 5,901. As such, the decline will bring the index closer to the average.

So, is this the end of the bull run? Not necessarily. What is clear, however, is that the index will be highly volatile in the near term.