Korean Stocks Hit Historic Lows but Buyers Vanish, JPMorgan Warns of Prolonged Leverage Selloff

Korean Stocks Hit Historic Lows but Buyers Vanish, JPMorgan Warns of Prolonged Leverage Selloff

TREE NEWS reports: South Korea’s KOSPI index has plunged into historically cheap territory, yet buyers are nowhere to be found. The benchmark has suffered its third five-day drop exceeding 15% this year, with forward price-to-earnings ratios compressed to record lows—even as fundamentals show little sign of deterioration. This rare divergence has captured market attention, with JPMorgan cautioning that the dearth of marginal buyers and lingering leverage risks could fuel further selling.

Valuation at Extremes, But Cheap Doesn’t Mean Bottom

The KOSPI’s forward P/E has fallen to an all-time low. Excluding memory giants Samsung Electronics and SK Hynix, the index trades at just 8.4 times forward earnings—the 11th percentile historically. Meanwhile, the relative strength index (RSI) has dropped to its lowest level since the “reciprocal tariff” era, with the number of oversold stocks at extreme levels. The index hovers near a major long-term trendline and is significantly below its 200-day moving average. Technically deeply oversold, but as market veterans know, oversold conditions can persist far longer than expected. The combination of valuation and technicals looks increasingly attractive, but the problem is: cheap alone doesn’t signal the end of selling.

Three Buyers Retreat Simultaneously, Support System Crumbles

The collapse of the support system is one of the most noteworthy structural shifts in this selloff. Since late August, corporate buybacks have been the market’s main pillar. However, Samsung has completed its repurchase program, and SK Hynix is nearing completion—this key source of demand is fading. Meanwhile, foreign investors continue to net sell, and domestic institutional demand remains weak. Just as global AI sentiment cools, the market has lost its most important buyers. The synchronized retreat of these three forces has left the KOSPI in a buyer vacuum at a technically fragile moment.

Trend-Following Funds Turn Net Short, Long-Only Investors Wait

The reversal in positioning is equally dramatic. Trend-following investors have shifted from extremely net long to net short after the rout. Tactically, this might be good news—extreme oversold conditions plus short covering could provide short-term rebound potential. But the overall liquidity picture remains fragile: long-only investors appear to be waiting for volatility to stabilize before re-entering. Until volatility meaningfully subsides, systematic buying is unlikely to gather momentum.

Leveraged ETF Holdings Remain High, Mechanical Selling Pressure Persists

Perhaps the most unsettling aspect of the current market landscape: despite the massive selloff, leveraged ETF holdings stubbornly remain elevated. JPMorgan notes that outflows have been surprisingly limited, and outstanding leveraged positions continue to create mechanical selling pressure on sharp down days. The market has undergone significant deleveraging, but leveraged positions have not been fully digested. This overhang means further selling waves cannot be ruled out until the size of these positions is substantially reduced. This is a key reason why attractive valuations and technicals have not yet translated into actual buying.

Price Down, Earnings Up: Divergence Suggests Liquidity-Driven, Not Fundamental Collapse

The most intriguing signal comes from the divergence between price and fundamentals. Samsung and SK Hynix shares have been hammered, but their forward earnings estimates have been revised upward during the October adjustment. This divergence is not limited to memory. Earnings expectations for industrials, financials, and healthcare also continue to trend higher, albeit with less price impact. Thus, the current repricing of Korean stocks is driven more by fund flows and risk appetite than by a broad deterioration in fundamentals. This implies that once selling pressure abates, the rebound could be substantial. The key question: when will buyers return?

KOSPI-SOX Divergence Widens, Global AI Sentiment Risk Lingers

An important signal to track is the widening divergence between the Philadelphia Semiconductor Index (SOX) and the KOSPI. US semiconductor stocks are showing initial signs of stabilization, while Korean stocks remain under pressure. This divergence cannot persist indefinitely; it will eventually converge or resonate. If the KOSPI fails to hold current key support, the US semiconductor rally could soon face headwinds. As one of the most important barometers of the global AI supply chain, the Korean market may be warning of deeper risks—with implications far beyond Korea itself.

Key Takeaways for Investors

• Valuation alone is not a catalyst: Extreme cheapness without a buyer base can persist; watch for signs of stabilization in leveraged ETF holdings and foreign flows.
• Leverage overhang is the wildcard: Until leveraged positions are fully cleared, mechanical selling pressure remains a risk.
• Fundamentals still intact: Upward earnings revisions suggest the selloff is liquidity-driven; a rebound could be sharp once selling exhausts.
• Watch the SOX-KOSPI divergence: A breakdown in KOSPI could signal trouble for global semiconductor and AI-related trades.