KOSPI Whipsawed by Foreign Selling: When Will It Recover?

After the 6,500 support level held since August gave way, the index fell to 6,000, and it also closed a long bearish candle below the 2011 moving average.

The fact that Korean KOSPI and KOSDAQ fell 14 to 15 percent or more, well beyond global markets, stems more from the mismatch in investor flows than from deterioration in industry conditions or corporate earnings.

A single day's rebound cannot be taken as a change in market sentiment. In a situation where foreign flows dictate the direction of the market, the substance of the rebound is what matters.

Factors such as whether the index holds the psychologically important 6,000 level, how fast it reaches the 2011 moving average, whether short positions are reduced, the scale of foreign buying in large caps, and whether trading volume supports the move are the yardsticks for judging a real rebound.

Client inquiries concentrate at the start and end of the session. When the early decline is small, clients call often.

As the decline deepens, the situation reverses. On days of steep drops like yesterday or the day before, clients do not call, and the PB reaches out first.

Once losses grow, investors lack the cash or capacity to buy more, which leads to a vicious cycle. PBs focus their advice less on the size of the loss and more on judging whether to keep holding the stock.

A market rebound could revive the account, but that is a matter of luck. Securing a safe collateral ratio to some degree is what matters.

Even when the index rebounds, some stocks recover quickly while others never return to their prior level. Even with the same loss, stocks in themes or weak companies that have lost momentum should be cut decisively.

When the market turns, switching into stocks likely to rise faster and more strongly speeds up recovery of the principal.

No one can know where the bottom lies, so averaging down must be approached with caution. At minimum, check whether selling pressure is easing or whether foreign spot and futures flows turn to net buying.

Also watch whether trading volume rises while the lows climb. It is prudent to average down only after these signals are confirmed.

Even excluding semiconductors, the AI cycle is the broader frame. Sectors tied to AI, such as materials and parts suppliers and power equipment, matter.

If foreign flows join these sectors and keep building, larger gains are expected. At the same time, it is worth filling in some weight in areas that can hedge macro variables.

WTI currently trades in the low $90s and Brent around $100. Risk premiums tied to the Middle East are considered to be largely priced in.

Some research suggests that the KOSPI can find stability in an environment where oil prices and treasury yields stabilize at the same time.

When WTI falls to around $60, however, inflation and cost burdens become issues.

Below $60 oil, concerns about the economy weigh more, and foreign net buying does not come in. Multiple macro variables, including oil and interest rates, need to be examined together.

Even when international oil prices surge and refining margins widen, SK Innovation rose only 4.5%. Treasury yields and CPI releases also have an influence. Since refining margins widen when oil prices spike, this needs to be monitored.

In fact, Treasury yields deserve as much attention as oil prices.

The market view is that secondary battery stocks benefit in common regardless of whether the Republicans or Democrats win the US midterm elections.

Energy Solution, Samsung SDI, and EcoPro are flashing warning signals in the market.

Since 2000, US midterm elections have been a major event. However, rather than which party wins, more attention should be paid to the seasonal market patterns that repeat before and after the vote.

Regardless of the Korean general election result, the market moved moderately in October through December right after the vote. A modest rise appeared whether the ruling party did better than expected or lost a few seats, while a big defeat brought a small gain and a strong showing or win brought a small decline.

The following year, a strong rebound occurred regardless of the election outcome. Past defeats were followed by gains above 3%, heavy defeats by gains above 11%, and wins by gains above 13%.

Foreign investors are currently selling the largest amounts in large-cap stocks. Electrical and electronics and finance are also major selling sectors for foreigners.

By contrast, foreigners are buying in petrochemicals and refining, transport equipment, pharmaceuticals, and transport and warehousing.

The market's direction in the first and second halves of the year moved in opposite directions. In the first half, the government's shareholder return policy and efforts to end the Korea discount were viewed positively, but the second half has been different.

Foreign investors see Korean politics as government-driven and the market as heavily swayed by government policy. This has lowered its investment appeal and ultimately turned into a question of trust in the Korean market.

Restoring trust requires a more active approach to shareholder returns. The direction and consistency of government policy also need to be established.

Corporate earnings and industry conditions are good, but establishing standards under which Korean companies are fairly valued comes first as a condition for restoring market trust. Inclusion in developed-market indices alone is not enough.

Consensus forecasts for headline CPI and core CPI diverge, so the market could react in two directions.

Amid this uncertainty, it has become harder for foreign investors to decide on additional buying.