A significant reversal in momentum trading, which dominated Asian equity markets in the first half of the year, is now underway, with South Korea emerging as the focal point of this shift.
The decline in South Korea's Kospi index is intensifying, with its 30-day volatility soaring to a record high, signaling potential for further losses. According to Bloomberg, the core drivers of this momentum breakdown include forced selling from leveraged ETFs, persistent foreign capital outflows, and the negative repercussions of retail investor leverage.
The impact of this reversal has spread to the broader Asian technology sector and is transmitting to global semiconductor stocks. The Philadelphia Semiconductor Index (SOX) has fallen over 18% from its June peak, while Japanese markets have also experienced net foreign outflows year-to-date. This shift in market sentiment is reshaping capital flows across the region.
The Peak and Turning Point for Momentum
In the first half of 2026, the momentum factor was the undisputed leader in global factor investing, particularly in Asian markets. David Savage, a Bloomberg Markets Live strategist, suggested that June likely marked the peak for momentum trading in Asian equities.
At that time, the scheduled rebalancing of major global indices provided a wave of price-insensitive buying for recent high-flyers closely tied to the AI theme. The SpaceX IPO further ignited retail enthusiasm, fueling a wave of chasing rallies across Asia. Stocks like SpaceX and Marvell Technology, newly added to benchmark indices, are now undergoing a mean-reversion style correction.
With the rebalancing window closed, the structural buying support for momentum trades has dissipated, abruptly turning the trend from a tailwind into a headwind.
Foreign Outflows and the Hidden Risk of Retail Buying
Massive foreign outflows have long made Asian markets highly reliant on retail capital. Year-to-date, overseas funds have sold over $100 billion worth of South Korean stocks—a figure made more striking as both the South Korean and Japanese markets surpassed the $5 trillion market capitalization threshold in June, entering the world's top eight exchanges and surpassing the UK and Canada.
Retail investors have filled the void left by foreign capital, a phenomenon most evident in South Korea. Unlike active and passive funds constrained by mandates that require periodic trimming of winning positions, retail accounts can hold onto outperformers indefinitely and even add to positions during declines, thereby amplifying the momentum effect. However, this behavior can also magnify losses exponentially when the trend reverses.
Leveraged ETFs: From Amplifier to Risk Multiplier
Retail investors amplified their bets using leveraged ETFs and margin buying, but these instruments have transformed from core products for momentum trading into a primary source of market risk.
Take memory chip giant SK Hynix as an example, where single-stock leveraged ETF holdings are highly concentrated. South Korea approved several domestically listed single-stock leveraged ETFs linked to SK Hynix and Samsung Electronics in late May, rapidly attracting massive inflows. The assets under management for products offering 2x daily return exposure ballooned. At their peak, just three SK Hynix leveraged ETFs had a combined AUM exceeding $23 billion, more than 2.5 times the stock's average daily trading volume.
These products maintain a 2x intraday leverage ratio through swaps and options. When the underlying stock price falls, the fund must sell holdings to restore the leverage ratio to its target level, creating a mechanical, passive selling pressure. This forced liquidation mechanism was triggered en masse in July, becoming a key force suppressing equity momentum and accelerating sector rotation.
South Korean regulators have responded by announcing a suspension on new single-stock ETF listings and strengthening oversight of trading in such products to curb market volatility.
Geopolitical Risks Resurface, Pressuring Asian Markets
The internal unwinding of momentum trades coincides with a deterioration in the external macro environment. The macro conditions that previously supported the outperformance of the momentum factor—declining cross-asset volatility, resilient global growth, and falling oil prices—are now reversing.
Renewed military conflict between the US and Iran has pushed crude prices higher, strengthening the US dollar and rekindling expectations for global interest rate hikes. Asian equities are particularly sensitive to the repricing of tighter financial conditions and geopolitical risks, bearing the brunt of this adjustment.
The Kospi's 30-day realized volatility hitting a record high signals that the recent downtrend has the momentum to extend further. This could persistently weigh on broader Asian market sentiment and continue to spill over into global semiconductor stocks. The reversal in momentum trading, starting from South Korea, is transmitting to wider markets.
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