The world's most crowded trade is unraveling

The dramatic reversal of the South Korean AI trading frenzy may be serving as a mirror for the global AI investment bubble.

Just six weeks ago, South Korea's AI-themed stocks were at the peak of their fervor. Now, one of the world's most crowded trades has experienced a violent washout—valuations have compressed significantly, leverage has been force-liquidated, and momentum has completely collapsed. The KOSPI index is currently testing its 200-day moving average, with its weekly RSI falling to historical extreme lows; at the same time, SK Hynix has completed a full "boom-and-bust cycle," with almost all previous gains wiped out.

The core question in the market has shifted from "how far can the decline go" to "has the excess in the system been sufficiently purged." According to estimates by Bank of America, South Korea's stock market attracted about $16 billion in inflows over the past four weeks, with large amounts of capital chasing at the highs, implying that position resetting will not happen overnight. Meanwhile, semiconductor, South Korean equities, and memory chip stocks are attempting to stabilize in deeply oversold territory, and some market participants are eyeing potential technical rebound opportunities.

Momentum Collapse: KOSPI Weekly RSI Hits All-Time Low

KOSPI's technical indicators have shown extreme signals. The index's weekly RSI has sunk to its lowest level on record, and the daily RSI has dropped to 31, entering deeply oversold territory.

Currently, KOSPI is testing its 200-day moving average and long-term trendline support. From a technical perspective, the oversold condition creates a foundation for a rebound, but analysts believe the excess built up in the AI rally accumulated over several months, thus any adjustment will also take time—the "AI hangover" will not end quickly.

As a representative stock of Asia's AI boom, SK Hynix is especially emblematic. Post-earnings selloff has dragged its share price back to its long-term trendline and the 200-day moving average region, with nearly all previous gains erased.

What deserves even more attention is the concentrated release of leverage risk. According to Goldman Sachs, SK Hynix's 2x leveraged ETF once became the world's largest single-stock leveraged ETF. As the market reversed, high-leverage trades further amplified volatility, with many investors experiencing the risks of leveraged instruments in a downturn cycle.

Despite the appearance of oversold signals on technical indicators, position pressure has not yet been fully released. According to Bank of America data, South Korea's stock market has attracted a cumulative $16 billion in inflows over the past four weeks, with some of these funds entering at market highs.

This suggests that market deleveraging remains a process, not a one-time event. Currently, semiconductor and memory chip stocks are seeking support in oversold zones. If there is stronger-than-expected positive news, a rebound could be amplified by position adjustments, but in the medium term, the valuation pressures built up by the AI trade still need further digestion.