[Good Morning Stock Market] "High Potential for Increased Volatility... Preparation Needed"

On the afternoon of the 16th, the closing price of the KOSPI was displayed on the electronic board in the dealing room of the Hana Bank headquarters in Jung-gu. (Photo by Yonhap News)

[Asia Economy Reporter Kum Boryeong] As the domestic stock market has passed its bottom in March and continued its upward trend, opinions were presented on the 19th that preparation is needed for the potential expansion of volatility that may occur in the future. Experts analyze that although the recent situation shows a slowdown in momentum, the stock market will explore new momentum over time, so preparations for this should also be made.

◆ Kang Hyunki, Researcher at DB Financial Investment = The current state of the stock market is very textbook-like. In a situation where the stock market's learning ability has deteriorated, recognition of underlying changes is slowly reflected in prices. Since there is a possibility of increased volatility going forward, it is considered a desirable time to approach investments with caution.

The stock market's learning ability varies depending on the phase. As the stock market starts from the bottom and continues to rise, the learning ability actually decreases. Therefore, when estimating the current position of the stock market, it is highly likely that its learning ability has deteriorated. There is also a possibility of delayed detection of underlying changes.

Because the stock market's path has an inverse relationship with its learning ability, the shape of prices formed at the market's lows and highs also differs. Suppose the stock market forms a bottom. Then, due to the preceding price decline, its learning ability is extremely enhanced. Prices can be formed sensitively to underlying changes in the stock market. Accordingly, the market bottom is usually formed narrowly and quickly. Conversely, suppose the stock market reaches a peak. Then, due to the preceding price rise, the learning ability is lowered. Even if the underlying market changes, the recognition of this change occurs gradually. Therefore, the market peak is formed broadly and slowly.

Looking at recent trends, the stock market has passed the bottom at the end of March this year and has continued a significant rise until now. If this situation continues, it is correct to see that the stock market's learning ability has significantly deteriorated not only now but also from a general perspective. We need to cautiously examine whether underlying changes are occurring here. Through various data, we have mentioned that volatility in the stock market may expand in the fourth quarter. This is because signs of overheating are appearing (valuation is at historically high levels), limits of stimulus measures are becoming apparent (weakening of the US Federal Reserve's QE and limitations in their fiscal policy capacity), and the economic short-cycle is declining again (decline in major countries' economic surprise indices and formation of peaks in PMI-related indices).

Therefore, the head and shoulders pattern currently shown by the stock market is very textbook-like. It is the result of a gradual recognition of underlying changes in a situation where the stock market's learning ability has deteriorated. Since there is a high possibility of increased volatility in the stock market in the fourth quarter this year, it is considered a desirable time to approach investments with caution.

◆ Seo Jeonghoon, Researcher at Samsung Securities = Since mid-September, the domestic stock market, which had shown a smooth upward trend for about a month, has recently shown signs of momentum slowing down. There are many reasons for the correction. First, the second wave of COVID-19 infections in the European region can be cited.

With the seasonal change in the Northern Hemisphere, where temperature and humidity decrease, COVID-19 cases are increasing rapidly. Although it was anticipated, partial lockdowns have been implemented, making contraction of the real economy inevitable. The responses of significant countries such as the UK, France, and Germany will be key points to watch going forward. Additionally, the deadlock over additional US stimulus measures is also a burden. As the possibility of an agreement before the presidential election has significantly decreased, the market has quickly lowered its expectations. As many central bankers worry, the slowdown in economic recovery speed in the fourth quarter may become visible.

The Blue Wave (a government led by the US Democratic Party), which had driven the market rebound so far, still reflects a probability of over 50%. However, the remaining three weeks is a period where any variable can emerge. Without clear positive factors, active risk-taking is naturally hesitant. Along with this, the mixed results of corporate earnings in the third quarter have narrowed the space for comfortable optimism. As half of global market trading volume decreased compared to the previous month, even small selling volumes have caused significant index volatility. The consecutive declines themselves are again triggering anxiety.

After the noise subsides over time, the market will explore new momentum. Considering the influence of the US presidential election and the current support rate structure, preparations for a Biden victory are necessary. The global trade environment is in the early stages of recovery, and the introduction of vaccines is gradually becoming visible, supporting a Biden trade favoring economically sensitive stocks. Assuming the continuation of the won's appreciation trend, foreign buying is likely to resume. Large-cap IT stocks preferred by foreigners, along with major export stocks, can be considered first. Semiconductor, automobile, and chemical sectors are also positive in terms of earnings improvement. Additionally, considering that comprehensive investment in eco-friendly energy may materialize after the US presidential election, attention should be maintained on companies related to hydrogen and solar energy.