Has the Plunge Cleared the Market? Analysis: Leverage Nearly Fully Unwound, South Korean Stocks Face a Second Short-Squeeze Buying Opportunity

The South Korean stock market has undergone a severe deleveraging cleanup, with excessive speculative sentiment largely digested, leaving the market at a new observation point.

After stabilizing and rebounding near the 200-day moving average, the KOSPI has entered a consolidation phase. Implied volatility has dropped rapidly, the scale of leveraged ETFs has shrunk noticeably, and margin balances continue to decline, indicating that previously accumulated leverage risks are being acceleratedly released. Meanwhile, the KOSDAQ continues its rebound, but the relatively weak performance of Samsung Electronics and SK Hynix continues to suppress the KOSPI.

In terms of valuation, the 12-month forward P/E ratio of the KOSPI has been significantly compressed. Analysts point out that after the clearing of leveraged funds and the stabilization of market volatility, if Samsung Electronics and SK Hynix rejoin the rebound, the South Korean stock market may still have substantial room for catch-up growth.

Source: Societe Generale

Deleveraging Complete, Volatility Drops Significantly

The root cause of this adjustment in the South Korean stock market lies in the speculative frenzy driven by ETF leverage and extreme options activity. According to LSEG Workspace data, the KOSPI previously exhibited the rare characteristic of "spot prices rising while volatility rose simultaneously," with the market's implied daily fluctuation range once reaching as high as approximately 6%.

As the wave of selling emerged, the KOSPI VIX underwent a major reset, and the current market-implied daily fluctuation range has fallen to about 3.8%. The assets under management of leveraged ETFs have shrunk sharply, margin balances have declined, and the pressure from margin calls is gradually normalizing.

From a technical perspective, the KOSPI saw a large bullish candlestick after stopping its decline near the 200-day moving average, but subsequent movements have become stagnant, trapped between the long-term trend line and the short-term downward trend line from historical highs. The 21-day moving average is slightly above the current price level; once broken through, options fund flows could amplify volatility again.

Source: Societe Generale

SK Hynix and Samsung Become Key Variables

SK Hynix is the core target of the South Korean AI rally, once regarded by the market as the "world's largest leveraged ETF." According to Societe Generale data, the assets under management of leveraged ETFs for SK Hynix and Samsung have shrunk significantly, indicating a considerable degree of deleveraging.

After rebounding strongly from recent panic lows, SK Hynix's stock price immediately gave back most of its gains and has now fallen back to near its long-term trend line. JPMorgan believes that the most difficult period for SK Hynix may be over. The bank remains reserved about reports of HBM pricing discounts of up to 50%, characterizing the infrastructure investment plan of up to 54 trillion South Korean won as a strategic layout to address long-term AI demand, rather than a signal of recent overcapacity.

JPMorgan maintains an overweight rating on SK Hynix with a target price of 2.75 million South Korean won, noting that catalysts such as shareholder return schemes, HBM pricing dynamics, and potential IPO progress for Solidigm are expected to materialize sequentially before the end of September.

Samsung Electronics is also near a key support level; if it can effectively reclaim this level, it could trigger a new round of short-squeeze market rally.

Source: JPMorgan

Source: Societe Generale