The South Korean stock market has staged a rare and rapid rebound, driven by a combination of technical and fundamental factors. However, the rally has conspicuously lacked participation from hedge funds, creating a scenario where the potential for a FOMO-fueled upward move remains.
The KOSPI index surged approximately 10% in just three trading sessions, and has now rebounded over 22% from its July 30 low, officially entering a technical bull market. This marks the first time the index has reached this threshold since the historic crash in July.
Meanwhile, volatility has nearly halved, foreign investors and local institutions continue to be net buyers, and market sentiment has clearly stabilized.
Despite this, hedge funds have significantly reduced their KOSPI positions, creating a notable divergence between current holdings and the index's rally. Analysts suggest that forced re-engagement could be the next catalyst for upward momentum.
Technical Confirmation and Sharply Lower Volatility
The KOSPI has firmly broken above its previous downward trendline and reclaimed its 21-day moving average. From a technical perspective, the current rebound is now confirmed, but a major test awaits with the 100-day moving average forming the next key resistance level.
Changes in volatility are equally noteworthy. The KOSPI VIX has nearly halved from its peak, though it remains elevated over a longer-term timeframe.
Importantly, this rebound—the largest since the crash—has occurred alongside a simultaneous drop in volatility. This is a stark contrast to the previous rally phase, where price increases were accompanied by surging volatility, a sign of excessive euphoria. The current environment suggests a more stable market sentiment, rather than irrational exuberance.
Foreign and Institutional Buying Meets Retail Profit-Taking
From a fund flow perspective, foreign investors have been the primary buyers in this rally. According to Goldman Sachs sales desk data, foreign net buying of the KOSPI has reached approximately $1.2 billion, with about $1.1 billion concentrated in the tech sector. The overall buying is almost entirely driven by tech stocks.
Local institutions have also been on the buy side, with net KOSPI purchases of around $383 million and net tech sector buying of approximately $432 million.
In contrast, retail investors have been consistently taking profits, with net selling in the tech sector alone reaching about $1.5 billion.
Risk appetite in the semiconductor memory sector remains strong. The Philadelphia Semiconductor Index rose 2.5% overnight, and ongoing optimism about shareholder returns from Samsung Electronics and SK Hynix provides significant emotional support for the market.
Hedge Funds Missing the Rally, Creating Accumulated Re-Engagement Pressure
The most notable structural feature of this rebound is the widespread absence of hedge funds.
Hedge funds have significantly reset their KOSPI positions, and the gap between current holdings and the index's movement continues to widen. In other words, the index has already completed a substantial recovery, but the positions of major institutional investors have not kept pace.
This vacuum in holdings, if confronted with continued upward pressure from the index, could trigger forced re-engagement, creating a self-reinforcing upward spiral.
Furthermore, the Philadelphia Semiconductor Index still maintains a clear lead over the KOSPI. If the KOSPI begins to close this relative performance gap, it will provide additional pressure for under-invested investors to add positions.
Can Samsung and SK Hynix Trigger a Short Squeeze in Memory Stocks?
On an individual stock level, SK Hynix has broken above its downward trendline and has been the most active target for foreign investors on a single-day basis. However, its share price still remains below the 21-day moving average.
Analysts believe that to trigger a genuine short squeeze, much larger trading volumes and a decisive break above the 21-day moving average are needed.
Samsung Electronics has clearly moved above the short-term downward trendline established since its all-time high and has reclaimed its 21-day moving average. However, the 50-day moving average represents the most critical resistance level that still needs to be broken.
Overall, if Samsung and SK Hynix can effectively break through their respective resistance levels and maintain sustained net foreign inflows, the current rebound could evolve into a systemic short squeeze in memory stocks, driven by low holdings, forcing hedge funds into a position of chasing the rally.
For investors still looking to position for upside, a call option spread strategy on the EWY (iShares MSCI South Korea ETF) currently offers a relatively more attractive risk-reward profile compared to outright long call options.
Comments