[Good Morning Stock Market] Three Early Signals Indicating the Bottom of the Domestic Stock Market

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[Asia Economy Reporter Eunmo Koo] There is an analysis that initial signals indicating the domestic stock market has hit bottom are emerging. The basis for this is that the market is becoming insensitive to negative factors, risk indicators have already reached their highest levels, and there is potential for stabilization in the foreign exchange market. As the possibility of bottom formation increases, it is advised to strengthen a bottom-fishing strategy for the Korean stock market.

◆Hyunki Kang, Researcher at DB Financial Investment=Initial signals of a bottom are appearing. There are three points to focus on. First, the market is becoming insensitive to negative factors. When the stock market declines, it reflects extreme scenarios in the stock prices. It amplifies the given negative factors and incorporates them into the stock prices. This behavior is especially intense in the early to mid-stages of a decline. At this time, the speed of the decline reaches its peak. Then, in the later stages of the decline, the degree of reaction to negative factors diminishes. Since most conceivable scenarios are already reflected in the stock prices, even if additional negative factors occur, the stock prices move mildly. This is the bottom. In recent days, the stock market’s reaction to negative factors has weakened. Despite continuous negative news, the price response has dulled. In other words, the current stock market is showing characteristics of insensitivity to negative factors, which is typical near the bottom.

Second, risk indicators are already at their highest levels. When the stock market becomes insensitive to negative factors, it means the stock prices are carrying a significant amount of worries. The stock market only rebounds when these issues gradually resolve. Therefore, it is necessary to first examine the degree of worries embedded in current stock prices. If risk indicators have risen excessively and there is room for them to decrease, it can be considered the bottom of the stock market. Currently, a valid risk indicator is the VIX index, which measures implied volatility in the U.S. stock market. Risks are more lurking overseas than domestically. Looking at the VIX now, on a monthly basis, it is higher than during the financial crisis. From a quantitative perspective, it is hard to say the world looks any riskier. From now on, there is a possibility that stock prices will climb over the wall of worries and rebound.

Lastly, there is potential for stabilization in the foreign exchange market. While the factors mentioned above are general methods to gauge the bottom of the stock market, observing the foreign exchange market is especially important for a stock market like Korea’s, which has a high proportion of foreign investors. Foreign capital inflow can only proceed smoothly if the foreign exchange market stabilizes. Here, it is necessary to consider the dollar’s characteristic of reflecting financial market risks. If the VIX, which is currently at a historic high, declines later, the dollar may follow a similar trend. Moreover, recent unlimited quantitative easing measures by the U.S. Federal Reserve should also be taken into account. This increases the possibility of the Korean won’s relative value improving. Consequently, a return of major supply-demand players can be expected.

◆Kyoungmin Lee, Researcher at Daishin Securities=It is necessary to pay attention to domestic policy and financial markets. On the 24th, the Korean government announced a second livelihood and financial stability package program worth 100 trillion won (the first was 50 trillion won). The support scope and scale, which were limited to self-employed, small and medium enterprises, and service, aviation, and tourism sectors in the first program, have been expanded to include mid-sized and large companies and key industries such as manufacturing. This shows that policy responses will strengthen according to the impact of COVID-19 on the Korean economy.

The series of domestic and international policy effects and changes in the financial market have also positively influenced the foreign exchange market and the trading patterns of domestic foreign investors. The won-dollar exchange rate fell below the 1,250 won level. Since recording 1,285.7 won on the 19th, it has shown a downward stabilization trend reflecting the Korea-U.S. currency swap agreement and policy expectations.

In the Korea Composite Stock Price Index (KOSPI) market, net foreign buying was recorded during trading hours for the first time in 14 trading days, and the net selling volume fell below 100 billion won. Notably, more than 150 billion won of net buying flowed into the semiconductor sector, which had been the focus of selling. The massive foreign selling was at the center of the KOSPI’s sharp drop in March. The shift to net foreign buying is a positive signal for the KOSPI.

This content was produced with the assistance of AI translation services.