The AI Bubble's Canary Just Died

For much of the past year, South Korea wasn't just participating in the AI boom, it was leading it. No major equity market embraced the AI narrative more aggressively. Retail leverage exploded, options activity reached extraordinary levels and semiconductor stocks became the epicentre of global speculative positioning. That leadership is now reversing. Since topping in June, the KOSPI has fallen around 35%, extending the decline with another near-11% overnight plunge. More importantly, the damage is no longer confined to the index. SK Hynix, Samsung Electronics and even Japan's AI favourite Kioxia are all breaking key technical levels, suggesting the unwind is spreading across the broader Asian semiconductor complex.

On June 16, just days before the KOSPI topped out, we warned about the growing mania, writing: "Korea's AI frenzy is creating one of the most extreme market structure setups in the world. Leveraged ETFs have exploded, options markets are pricing extraordinary moves, and dealer hedging flows have become large enough to influence the underlying market itself... the risks lurking beneath the surface are growing just as fast." Since then, the KOSPI has crashed around 35%, extending the sell-off overnight with another near-11% plunge. Parabolic rallies rarely unwind gracefully. The KOSPI is now trading decisively below its 50-day moving average and rapidly approaching both its 200-day moving average and the long-term trendline that defined the AI bull market. Even if a relief rally emerges, repairing this kind of technical damage typically takes months rather than weeks.

The KOSPI is at its most oversold level since April 2025, but the RSI has yet to reach extreme territory. As history repeatedly reminds us, oversold markets can remain oversold far longer than most investors think possible. The second chart tells a similar story from a weekly perspective. Momentum is clearly washed out, but still far from the kind of capitulation that has historically marked durable market bottoms.

When volatility breaks the market

We've written extensively about the KOSPI VIX. During the AI melt-up, soaring spot prices and insatiable demand for upside options drove implied volatility to extraordinary levels. As we've argued repeatedly, the unwind works just as powerfully in reverse. Rich option premiums led to aggressive options selling, reinforcing the decline in both implied volatility and spot. Despite the KOSPI collapsing almost 11% overnight, the KOSPI VIX barely blinked by historical standards. That's not a sign of stability; it's a sign of a market that remains structurally broken. The volatility complex has yet to normalise, and it is likely to continue distorting price action long after the initial crash has passed.

KORU, the 3x leveraged Korea ETF, peaked at around $64 in early June. It closed at $17 yesterday and is set to fall even further following the brutal overnight collapse in the KOSPI. Many investors are now trapped, hoping to break even. But leveraged ETFs target daily returns, not long-term returns. Daily rebalancing creates performance drag, making recovery from large losses far harder than most investors realise.