AI Bubble’s Canary in the Coal Mine Has Just ‘Died’
- Key Insight: The South Korean stock market has experienced a sharp sell-off amid a retreat from the AI boom. The collapse of its semiconductor sector is seen as an early warning signal that global AI assets may be entering a phase of repricing.
- Key Factors:
- South Korea’s KOSPI index has fallen by a third in the past month. Semiconductor leaders SK Hynix and Samsung Electronics have plunged nearly 47% and 35% respectively over the same period, becoming the epicenter of the sell-off.
- The 3x leveraged South Korea ETF (KORU) has dropped approximately 78% from its June peak, highlighting the amplifying effect of leveraged funds during market downturns and the associated risk of long-term capital erosion.
- The KOSPI, which previously led the Philadelphia Semiconductor Index (SOX) on the upside during this cycle, is now leading on the downside. A divergence has emerged (the KOSPI has fallen back to current levels while the SOX remains roughly 20% higher), suggesting the SOX faces pressure to catch down.
- The South Korean government has stated it “is not currently intervening” in the market, characterizing the plunge as a market reassessment process. It is also considering restricting access to single-stock leveraged ETFs to professional investors only, which has drawn sharp criticism from retail investors.
- Technical indicators show that although the market has entered oversold territory, panic sentiment and trading volume have not yet been fully released, and there is no clear signal that the adjustment has concluded.
Original Authors: Li Jia, Dong Jing
Source: Wall Street Insights
In the coal mining era, canaries were used to detect dangerous gases early, and their collapse often signaled that greater danger was approaching.
Today, the South Korean stock market seems to be becoming that "canary" in the ebbing tide of AI frenzy.
As one of the most crowded markets in this AI trade, South Korea's semiconductor sector was the first to experience a sharp sell-off.
After plummeting nearly 11% on the 28th, the KOSPI index fell as much as 13% intraday on the 29th, closing down nearly 6%, losing one-third of its value in the past month.
The 3x leveraged South Korea ETF KORU has fallen from a June high of around $64 to $14, a cumulative decline of 78%.
The South Korean market was previously one of the biggest beneficiaries of the global AI boom, with capital flocking to assets related to memory chips, HBM, and AI infrastructure.
But now, these same crowded, high-expectation assets are the first to be sold off.
Markets fear this may not just be a correction in the South Korean stock market, but an early signal of the AI trade beginning to recede.
Notably, KOSPI had led the Philadelphia Semiconductor Index (SOX) higher during this AI cycle, and is now leading the decline. (SOX broke below the key support level of 11,200 points last night.)
Now that the KOSPI "canary" has fallen, global investors are re-evaluating a key question: Are the high valuations and high expectations for AI assets entering a phase of repricing?
Interestingly, facing substantial retail investor losses and public pressure, the South Korean government is "holding off on market intervention," stating that there is no need to activate the Stock Market Stabilization Fund and blaming the crash not solely on leveraged ETFs. This stance has triggered a strong backlash from retail investors, who accuse the government of aggressively encouraging market participation and then shifting blame when the market collapsed.
South Korean Finance Minister Koo Yun-cheol publicly apologized during a parliamentary question session on Wednesday, accepting lawmakers' criticism regarding the hasty launch of single-stock leveraged ETFs without sufficient due diligence. Separately, Lee Eog-weon, Chairman of the Financial Services Commission, stated the same day that regulators are considering restricting access to such products to professional investors and reviewing the reduction of leverage multiples.
Ebbing AI Frenzy, South Korea Becomes the First Domino to Fall
Since its peak on June 22, the KOSPI has fallen nearly 38%, with the latest round of selling intensifying market panic.
In the previous frenzy of AI infrastructure investment, South Korean semiconductor companies became major beneficiaries. SK Hynix became a market darling due to the surge in demand for High Bandwidth Memory (HBM), and Samsung Electronics also benefited from expectations of AI server supply chain expansion.
But as market risk appetite rapidly cools, funds are beginning to exit.
On the 29th, despite SK Hynix's earnings significantly surpassing historical levels, the results still disappointed the market, causing its stock to fall over 9% again, down nearly 47% in the past month. This reflects a deep contradiction in the current tech investment logic—market earnings expectations for AI-related companies have been pushed to extreme levels, and any result that does not fully meet them can trigger massive sell-offs.
Samsung Electronics simultaneously lost its 100-day moving average and long-term trend line, plunging 35% in the past month.
"Given the weight of SK Hynix and Samsung in the KOSPI, there is no safe haven when both fall simultaneously," said Josh Gilbert, Senior Market Analyst for eToro in Asia Pacific and the Middle East.
The market's fear is that this may not just be a single market correction but the beginning of the AI trade spreading from core assets to peripheral ones.
Technical Deterioration, Market Hasn't Truly 'Capitulated' Yet
From a technical indicators perspective, the KOSPI correction does not yet show clear signs of ending.
Although the index briefly broke below its 50-day and 200-day moving averages intraday, approaching the long-term trend line that has supported the current uptrend.
The RSI has fallen to its lowest level since April 2025, indicating the market has entered oversold territory. However, historical experience shows that oversold does not necessarily mean an immediate bottom.
True market bottoms are usually accompanied by more intense panic, increased volume, and a full-blown spike in volatility. Currently, the reaction of the KOSPI volatility index remains relatively limited, suggesting the market structure may not have fully cleared.
In other words, while prices have adjusted significantly, it remains uncertain whether the 'final capitulation' phase in terms of sentiment is complete.
The Leverage Trap: KORU's Collapse Reveals AI Trade Risks
Leveraged funds are amplifying the downward pressure on the South Korean market.
The 3x leveraged South Korea ETF KORU, which hit around $64 in early June this year, has recently fallen to near $14, a decline of nearly 80%.
For investors holding such products, the biggest risk is not simply the index decline itself, but the long-term decay caused by the daily rebalancing mechanism of leveraged ETFs.
These products track daily return multiples, not long-term cumulative returns. When the market declines amidst continuous fluctuations, the compounding effect erodes the net asset value. Even if the underlying index returns to its previous high, the leveraged ETF may not recover proportionally.
Leveraged capital that flooded in during the AI boom is now becoming a source of forced selling during the market downturn.
South Korea's 'Canary' Warning: The Start of a Global AI Asset Repricing?
The key question for the market now is whether the crash in South Korean semiconductor stocks will spill over to global chip assets.
Data shows that KOSPI's previous rally once outpaced the Philadelphia Semiconductor Index (SOX), making it one of the most aggressive representatives of the AI trade. Now, while KOSPI has fallen back to current levels, SOX remains about 20% higher, showing a clear divergence between the two.
If historical correlations reassert themselves, the global semiconductor index may still face catch-up downside pressure.
Of course, the South Korean market does not necessarily represent the entire AI industry cycle. US Big Tech's AI capital expenditure, cloud computing demand, and orders for advanced chips remain the core drivers of the industry's fundamentals. But from a capital flow perspective, South Korea is becoming an important window to observe whether the AI trade has overheated.
If the AI boom can still digest valuations through realized corporate earnings, this will be merely a healthy correction. However, if capital begins to reassess the return cycle for AI investments, then today's sharp volatility in the South Korean market might just be the beginning of a global repricing of AI assets.
The canary has fallen. The next thing for the market to observe is whether it signals local oxygen deprivation or the entire mine is losing air.
S. Korean Government Blames Market, Refuses Bailout, Drawing Sharp Retail Criticism
According to a report by the JoongAng Ilbo on July 29, Kim Yong-beom, Chief of the Office for Government Policy Coordination, who is accompanying President Lee Jae-myung on his visit to Brazil, stated that the government is closely monitoring the market but the situation has not reached the stage requiring the activation of the Stock Market Stabilization Fund.
He characterized this crash as a 'reassessment process' where the market seeks equilibrium, attributing the high volatility in the South Korean stock market to structural issues such as active retail trading, the proliferation of derivatives, and high weighting of semiconductor bellwethers, and tried to distance the government from responsibility for leveraged ETFs, saying 'you can't attribute all the problems to that one cause.'
These remarks quickly sparked a strong backlash in South Korean online communities and among investors.
Critics argue that the government previously aggressively created hype to lure retail investors into the market, but now that the market has crashed, it is shirking responsibility under the guise of 'market self-correction,' showing a contradictory attitude.
Online comment sections are filled with similar voices:
"The government initially encouraged retail investors to enter the market. Now the market has collapsed, and not only do they not admit fault, but they also claim it's someone else's business."
Analysts predict that as market volatility persists, policy accountability pressure from retail investors and the opposition party will further intensify.
