[MarketING] Time to Verify Expectation Psychology

KOSPI Takes a Breather, Drops Below 2470
Super Week Packed with Key Events, Market Expected to Remain Cautious

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The KOSPI, which had risen for five consecutive trading days, appears to be taking a breather. With a series of events scheduled this week to verify the factors that have influenced the stock market so far, market sentiment is expected to lean towards cautious observation.

KOSPI Weakens After 6 Days... Drops Below 2470

As of 10:15 a.m. on the 20th, the KOSPI stood at 2,463.79, down 20.23 points (0.81%) from the previous day. The KOSDAQ fell 0.75 points (0.10%) to 740.50. Both the KOSPI and KOSDAQ started the day higher but turned downward. This seems to be a pause due to accumulated fatigue from the sustained rise last week.

Above all, with important events scheduled this week, cautious sentiment is also at play. This week is expected to involve a process of verifying the optimistic factors that have driven the stock market's rise through the scheduled events.

First, the U.S. Federal Open Market Committee (FOMC) regular meeting is scheduled from the 31st of this month to the 1st of next month. On the 31st, China's January Manufacturing and Non-Manufacturing Purchasing Managers' Indexes (PMI) will be released, along with Samsung Electronics' finalized Q4 and annual earnings for last year. On the 1st, South Korea's January export and import data will be announced, and on the 3rd, the U.S. January employment report will be released.

Lee Kyungmin, a researcher at Daishin Securities, said, "This week marks a time to verify the optimistic sentiment that has led the stock market rebound so far," adding, "Through China's Manufacturing PMI, we will gauge the speed of China's economic recovery; at the FOMC meeting, we will check the rate hike magnitude and the Federal Reserve's stance; and through Samsung Electronics' earnings announcement, we will confirm whether production cuts are in place."

The gap between the Fed and the market regarding interest rate cuts within the year is expected to be somewhat clarified at this FOMC. Han Jiyoung, a researcher at Kiwoom Securities, said, "Currently, the market is pricing in 25 basis points (1bp=0.01 percentage point) hikes in February and March, followed by a 50bp rate cut by the end of the year," adding, "Whether this bet is valid will depend on Fed Chair Jerome Powell's comments after the February FOMC rate decision."

There is also a possibility of a 50bp rate hike at the FOMC. Lee said, "If the market's excessive expectations for rate cuts persist, there is a possibility that the FOMC in February could unexpectedly implement a 50bp rate hike," adding, "Among the 12 Fed members with voting rights, only two have officially supported a 25bp rate hike."

On the 31st and the 1st of next month, China's January National Bureau of Statistics and Caixin Manufacturing PMI will be released. The National Bureau of Statistics' Manufacturing PMI is forecasted at 50.1, likely rebounding from December's 47. The Caixin Manufacturing PMI is expected to slightly rise to 49.8 from December's 49. Lee analyzed, "China's economy is moving away from its worst phase, but it is still difficult to determine whether it has passed the bottom or is improving," adding, "Expectations for China's economic recovery will vary depending on whether the PMI enters an expansion phase, and it seems somewhat insufficient to serve as a surprise momentum for the stock market."

South Korea's export and import growth rates, to be announced on the 1st, are expected to be -11.5% and -3.6%, respectively, showing a larger decline than December's -9.5% and -2.4%. Lee said, "Attention will particularly focus on changes in China's and semiconductor export growth rates," explaining, "This allows checking changes in South Korea's export momentum and gauging whether the recent KOSPI rebound drivers?China's economic recovery and semiconductor industry improvement expectations?are materializing."

Focus on Sectors That Have Risen Less

Given the rapid rise in stock prices in January, a breather should now be considered. The KOSPI has risen more than 11% this month, the highest for the same month since 2001 when compared to past monthly returns.

Kim Daejun, a researcher at Korea Investment & Securities, said, "Looking at the Relative Strength Index (RSI) on a daily basis, the KOSPI is in a very overheated state in the short term," adding, "The upward trend may continue a bit longer, but as recent price movements show, the upward momentum is gradually weakening." He also noted, "The KOSPI's price-to-earnings ratio (PER) multiple exceeding 12 times could also be a burden."

Many sectors rose sharply in the short term during the January rebound. Accordingly, future market responses should focus on stocks that have risen less. Kim explained, "Looking at sectoral RSI, most sectors have entered the overbought zone with RSI above 70%," adding, "During the market's breather, stocks that have risen less may exhibit less volatility than expected, and sectors with potential upward momentum from a price perspective currently include software, which encompasses platforms and games."