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Will the surging Korean stock market be the next trigger for a "black swan" event?

Boosted by artificial intelligence-related trading, emerging market stocks are rising, and investors are ignoring concerns about the deadlock in US-Iran peace negotiations. On Monday, an index measuring emerging market stock performance rose as much as 1.4%, potentially hitting a record closing high. Among them, the Korean stock market performed especially well, driven by giants like SK Hynix, Samsung Electronics, and MediaTek, as well as investors aggressively buying semiconductor heavyweight stocks amid worries about storage chip shortages. The Korean stock index soared 5%, also reaching a historic high. The strong upward momentum has raised concerns that tech stocks are overvalued and may experience a correction. Little Caishen believes that everyone should closely monitor the Korean stock market in the future, as it could become the fuse for igniting the next financial "black swan."

First, from a technical perspective, the Korea Composite Stock Price Index (KOSPI) has increased by over 54% in just two months, setting new records for five consecutive trading days, and is only one step away from the 8,000-point mark. Behind this extreme market condition, technical indicators have already issued clear overbought warnings.
Looking at the Relative Strength Index (RSI), as of May 11, the 14-day RSI of KOSPI had risen to 87.2, far exceeding the overbought warning line of 70, and approaching the extreme overbought zone near 90. Historical data shows that when this indicator exceeds 80, the probability of a correction within the following 30 trading days is as high as 85%, with an average correction of over 12%. Meanwhile, the index's Bias (BIAS) has reached 18.6, indicating that current stock prices are significantly deviated from the 20-day moving average, with short-term profit-taking piling up in the market, which could trigger panic selling at any time. More alarmingly, this rally shows a clear "80/20" divergence pattern. The market capitalization of semiconductor giants like Samsung Electronics and SK Hynix accounts for over 35% of the total KOSPI market value. The stock prices of these two companies have increased by 72% and 89% respectively this year, becoming the main drivers of the index's rise. If a sharp correction occurs, the index is likely to become chaotic.

Second, from a macro perspective, behind the prosperity, multiple macro "gray rhinos" are quietly approaching and could become the final straw that breaks the market at any moment.

First is the risk of an AI bubble burst. The current high prosperity in the semiconductor industry largely depends on capital expenditure in the AI supply chain. According to Goldman Sachs, the five largest cloud service providers worldwide are expected to increase their capital spending by 38% year-over-year this year, but this aggressive expansion is supported by high leverage. If AI technology implementation falls short of expectations or corporate profitability cannot cover high debts, a retreat in capital expenditure could trigger a chain reaction in the semiconductor industry. As the global hub for storage chips, Korea will be the first to be impacted.

Second is the uncertainty surrounding the Federal Reserve's monetary policy shift. Despite recent strong US employment data, inflationary pressures have not been fully alleviated. The market generally expects the Fed to resume rate hikes in the second half of the year, which would strengthen the dollar and cause global capital to flow back to the US. Korea's stock market has attracted a large amount of foreign investment in recent years, with foreign holdings exceeding 30%. Once the Fed raises interest rates, the rapid withdrawal of foreign capital could trigger a double risk of won depreciation and stock market plummeting. During the Fed's rate hike cycle in 2022, the Korean stock market plummeted 22% within three months. This historical lesson warrants caution.

Furthermore, geopolitical risks always hang like Damocles' sword over the Korean stock market. As a major energy importer, Korea relies on imports for 97% of its oil and natural gas. Any turbulence in the Middle East could trigger energy price fluctuations, impacting Korea's economy. In March this year, escalating US-Iran conflicts caused the KOSPI to plunge 12.06% in a single day, the largest single-day drop in history. Now, with US-Iran peace negotiations deadlocked, geopolitical risks could resurface at any time, potentially triggering a market crash.

Looking back at history, black swan events triggered by short-term sharp stock market rises are not uncommon. In 1990, Japan's stock market bubble burst, with the Nikkei index plunging 60% over three years, leading to Japan's "Lost Decade." Before the 2008 US subprime mortgage crisis, the Dow Jones Industrial Average rose 20% in a year, and its subsequent collapse triggered a global financial crisis. As the current "brightest star" among emerging markets, if the Korean stock market experiences a collapse-like correction, it will inevitably drag down the entire Asia-Pacific and even global stock markets, potentially triggering a "black swan" event. Everyone must be cautious!