'7.2%→12%→9.63%' Worse Than Gold or Silver... Wall Street Warns of "Frenzied Bubble" in KOSPI

Proprietary Bubble Risk Indicator Nears Overheated Level of 1

"Signs of Overheating Also Seen in the Options Market"

Bank of America (BofA), a major U.S. bank, has drawn attention by analyzing the extreme volatility in the Korean stock market as a "classic example of a bubble."

According to MarketWatch, a financial market news outlet, on the 11th (local time), BofA equity strategists analyzed the price movements of the KOSPI index. In particular, they highlighted the case of extreme volatility, where the KOSPI plunged by 12% one day and then suddenly rebounded by 10% the next day. The strategists noted that this movement of the index is similar to patterns observed during the Asian financial crisis, the dot-com bubble, and the 2008 global financial crisis.

Previously, on the 3rd of this month, the KOSPI fell sharply by 7.24% due to the U.S. and Israel's airstrikes on Iran and ensuing concerns over high oil prices. The following day, it recorded its largest-ever single-day drop of 12.06%. However, just one day later, on the 5th, the index rebounded sharply, closing up by 9.63%.

BofA offered the analysis that this phase is closer to a bubble than to market confidence. BofA has developed its own "bubble risk indicator" to measure overheating in financial markets, which combines asset returns, volatility, momentum (upward trends), and vulnerability into a single score ranging from 0 to 1. The closer the value is to 1, the more overheated the market is considered to be.

On the morning of the 12th, the Kospi index showed a slight decline, falling below the 5,600 level in early trading. The Kospi and the KRW/USD exchange rate are displayed in the dealing room of Hana Bank in Jung-gu, Seoul. Photo by Yonhap News

BofA strategists, after analyzing the KOSPI, stated that "the bubble risk indicator for the index was at an extreme level, close to 1," and argued that "overheated activity is also evident in the options market." The strategists also gave a negative assessment of Korean retail market participants, pointing out, "Korean individual investors, who have recently driven historic rallies, further support the typical bubble environment observed in the KOSPI last week."

BofA judged that the bubble level of the KOSPI was even higher than that of gold, silver, Brent oil, and the Bloomberg Commodity Index in the past. However, this assessment was made before the recent dramatic swings in oil prices.

Meanwhile, Wall Street fund managers have recently warned of the potential overheating of the KOSPI. Michael Burry, the short-selling investor depicted in the film "The Big Short," recently remarked, "The movement in the KOSPI over the past month has been driven by institutional investors, and the volatility itself is a clear sign that momentum traders have entered. The fact that institutions are engaging in day trading is like seeing one of the Four Horsemen of the Apocalypse."

Former JP Morgan analyst Marko Kolanovic also claimed earlier this month that the KOSPI is "the new silver," warning, "Beware of the upcoming crash. Investors buying now are very unlikely to ever see these levels again in their lifetime."

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