Kospi Index is falling today: here’s why it may eventually crash to 5k

South Korea’s Kospi Index crashed by over 6% today, May 15, as the recent rally took a breather and investors started to book profits. After crossing the key resistance at 8,000 this week, it plunged to 7,585. 

Local and foreign investors are selling South Korean stocks

The Kospi Index tumbled by over 6% on Friday, its worst performance since March as investors started to book profits after its recent surge.

Data shows that foreign investors have continued selling their holdings, with most of the most dumping the technology companies that fueled the rally. Data shows that the tech subgauge experienced over $2.5 billion in outflows.

Data compiled by ETF.com shows that the iShares MSCI South Korea ETF (EWY) has had outflows in the last three consecutive weeks, shedding over $1.2 billion in assets.

There are signs that local investors are also selling their Kospi assets as they book profits following the strong rally. Despite the ongoing pullback, the index has jumped by over 70% this year.

The ongoing Kospi Index pullback is also in line with that of other global stocks. In China, the Shanghai Index dropped by over 0.42%, while the Hang Seng Index dropped by over 1.53%.

Japan’s Nikkei 225 Index dropped by over 2% as the country's bond yields continued their strong rally. In Australia, the ASX 200 Index dropped by 0.30%. American stock index futures also pulled back from their all-time highs.

The only major Asian index in the green was India’s Nifty 50, which received a boost from Adani companies, which jumped after the Trump administration moved to end lawsuits against Adani and his companies.

The Kospi Index has been in one of its longest bull markets this year, with technology companies leading the charge. Samsung has already entered the $1 trillion club, and SK Hynix, a company that was valued at less than $100 billion a few years ago is approaching that milestone.

These companies have benefited from the ongoing AI boom that has led to high demand for their chips, and this demand is not showing signs of slowing down. The index has also benefited from the ongoing retail participation and government policies that promote stock market investments.

Kospi Index is facing some major risks ahead

Kospi Composite Index chart | Source: TradingView

Still, analysts caution that the ongoing Kospi Index rally is not sustainable in the long term. For one, it has now become one to the most expensive global indices, with its price-to-earnings ratio rising to 30, much higher than the S&P 500 Index's 22.

Technicals also suggest that the index has remained in the extreme overbought levels in the past few months. It is the first time that the index has moved to extreme overbought levels in years. In most cases, highly overbought assets tend to experience sharp pullbacks.

The index is also in the markup phase of the Wyckoff Theory, which is followed by the distribution and markdown. As such, we would not be surprised if the index tumbled to 5,000 in the coming months.