[Good Morning Stock Market] "KOSPI Overbought Phase... Conservative Approach Needed"

Last Week's US Stock Market Slightly Up
Macro Factors Like Interest Rates and Economy Expected to Strengthen

Experts Say "Focus on Reality Rather Than Fed Pivot Expectations"
"Avoid Overbought Sectors, Watch Stocks That Have Already Declined"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Last week, the U.S. stock market saw only slight gains amid ongoing recession concerns and disagreements over the pace of interest rate adjustments. The Dow Jones Industrial Average rose by 0.59%, the S&P 500 increased by 0.48%, and the Nasdaq Composite edged up by 0.01%. Reflecting these influences, the domestic stock market may also show a modest upward trend; however, caution over interest rates and recession fears are expected to limit index gains.

Kyungmin Lee, Researcher at Daishin Securities: “It’s time to face reality after earlier optimism on the economy and monetary policy”

Since the November FOMC (Federal Open Market Committee), the pace of interest rate hikes has been officially moderated through the statement. The Fed’s intention is to continue the rate hike cycle until inflation is controlled, even if it means adjusting the size of rate increases. However, the market has expanded this expectation beyond a Fed policy pivot to include rate cuts in the second half of 2023.

For rate cut expectations to materialize, the economy must be significantly weak; if the economy is healthy, rate cuts are unlikely. This means incompatible expectations have simultaneously entered the market.

It is important to remember that the Fed has been cautious about market expectations of a pivot and has stated that discussions about pausing rate hikes are premature. Once the minutes are released this week, expectations for early rate cuts will inevitably retreat. While economic deterioration continues, the expectation for rate cuts is likely to diminish.

In conclusion, the current KOSPI is overshooting. For further gains and a trend reversal, improvements in earnings and the economy are necessary, but immediate rate cuts are unlikely. Instead, price adjustments are more likely to narrow the gap with fundamentals and alleviate valuation pressures.

The semiconductor and secondary battery sectors, which had led the index gains, are now showing signs of instability, and foreign investors have turned to net weekly selling for the first time since October. Even if there are attempts at additional rebounds through sector rotation, risk management should be prioritized.

Daejun Kim, Researcher at Korea Investment & Securities: “Respond with sectors that have already declined”

Among technical indicators, the Relative Strength Index (RSI) moves between 0 and 100% and reflects the relative strength of upward and downward price pressures. An RSI above 70% indicates an overbought condition; currently, the KOSPI’s RSI stands at 74.9%. Despite the KOSPI falling for the first time in five weeks due to macroeconomic uncertainties, the stock price remains in an overbought phase.

Since the RSI has peaked and changed direction downward, investors should maintain a cautious stance. This is because the KOSPI, which surged sharply in the short term, may follow a similar pattern. With the third-quarter earnings season effectively ending last week, the influence of earnings variables has weakened, implying that macroeconomic factors may have a stronger impact.

Hawkish comments from Fed officials are also reducing risk asset appetite. Following St. Louis Fed President Bullard’s remarks about a 7% interest rate, the Atlanta and Boston Fed Presidents have also supported the rate hike stance. The Bank of Korea’s Monetary Policy Committee meeting scheduled for the 24th is widely expected to raise the base rate, so the stock market is likely to quickly reflect this outcome.

In terms of investment strategy, if sector preferences are determined by RSI, sectors close to the overbought phase should gradually reduce their weight, while sectors not in that phase should be observed from a bargain-buying perspective. Sectors with a significant decline in RSI compared to the previous week, not in an overbought phase, and with earnings forecasts largely intact include the automobile and defense sectors.

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