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Korean semiconductor stocks sold off into SK hynix earnings, with analyst Martin Leinweber calling the EWY move a rare capitulation signal. The catalyst is upcoming SK hynix results and the semiconductor read-through for NVDA.
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EXCLUSIVE: Korea's Chip Selloff Flashes Rare 'Capitulation' Signal Ahead of SK Hynix Earnings, Analyst Says South Korea’s stock market has lost more than a fifth of its value in a month. Yet a stress gauge that has fired only 10 times since 2010 says the selling may be close to running out. MarketVector Indexes’ Equity Capitulation Indicator hit 97.9 on the iShares MSCI South Korea ETF (NYSE:EWY) last week, above the 95 level that marks a major signal. “We read the history as evidence that this kind of selling tends to exhaust itself, not as a forecast,” Martin Leinweber, CFA, head of digital asset research at MarketVector Indexes, told Benzinga in an exclusive interview. The real test arrives next week. SK Hynix Inc. (NASDAQ:SKHY) reports third-quarter results on the evening of Oct. 27 in New York, hours before the Federal Reserve’s decision. Eight Out of 10 Past Signals Ended Higher The indicator, scaled from 0 to 100, blends four stress measures, from the distance below the 50-day average to oversold momentum. A reading above 95 means all four sit near their extremes at once. According to Leinweber, EWY was higher one month after a signal in eight of 10 cases, with a median gain of about 6%. Three months later, the median gain was about 16%, against a typical three-month return of about 2% since 2010. This episode, however, has started slowly. EWY closed Thursday at $149.06, down 5% on the day and slightly below its signal-day close. The fund has lost about 20% over the past month, although it is still up roughly 48% this year. MarketVector Equity Capitulation Indicator readings on the iShares MSCI South Korea ETF since 2010. Source: MarketVector Indexes This Korea Capitulation Signal Fired Closer to the Trend Than Ever Earlier signals came with EWY between 6% and 26% below its 200-day average, mostly during broad selloffs. This one fired just 5% below it. The nearest precedents, May 2010 and June 2013, were sharp corrections inside an uptrend. Three months later, EWY was 14% and 25% higher, respectively. “A fast drop in an intact trend usually reflects forced selling by leveraged and crowded positions rather than a collapse in fundamentals,” Leinweber said. Still, he added a caveat: “Two precedents is a thin sample, and the first leg of a genuine regime change can look like this.” Read Also: Is SK Hynix Stock a 270% Opportunity? Nomura Says Yes The Trigger Was Global. Korea Amplified It In Leinweber‘s view, the selloff began with a rethink of how the AI buildout gets financed, after remarks by Nvidia Corp. (NASDAQ:NVDA) CEO Jensen Huang on capital shortages and the post-earnings slide in Meta Platforms Inc. (NASDAQ:META). Korea, however, magnifies the move. Samsung Electronics Co. and SK hynix make up more than half of the KOSPI’s weighting, which turns the index into a proxy for global AI hardware sentiment, he said. Meanwhile, the spillover to U.S. names is already happening. Micron Technology Inc. (NASDAQ:MU) fell 6.3% on Thursday. “Right now the market is questioning how long the cycle lasts and how it gets funded. It is not responding to weaker current demand,” Leinweber said. What SK Hynix Needs to Show In July, SK hynix posted a six-fold jump in profit, yet the stock fell sharply because results lagged lofty expectations. This time, the bar is lower, with the operating profit estimate 5.6% below where it stood three months ago. Leinweber is watching three things: HBM4 volumes shifting into the fourth quarter rather than disappearing, firm customer commitments for 2027 and conventional DRAM contract prices still rising into year-end. “If SK hynix delivers on visibility, the market can treat October as a financing scare rather than a cycle top,” he said. SK hynix shares rose 4.4% in Seoul on Friday. Even so, they are down about a third over the past month, while still up roughly 96% this year. Read Also: SpaceX Lifts All Boats: Chip Stocks Claw Back $274 Billion After a $1.6 Trillion Rout The $158 Line Decides the Korea Capitulation Signal A break below the 200-day average would not automatically kill the thesis. In four of the 10 earlier episodes, EWY made a lower low of more than 5% within three months. In March 2020, it fell another 16% in seven trading days, yet stood 22% higher three months after the signal. By contrast, the signal failed in October 2018 and June 2022, both during memory downcycles. For this reason, Leinweber would reassess if EWY stays below its 200-day average for weeks and memory earnings revisions turn negative. On the upside, a sustained close above that average, around $158 on his numbers, would show buyers have returned. EWY has tested the line twice this month and closed below it both times. The indicator says Korea’s selling is stretched. Next week, SK hynix will show whether the fundamentals agree. Image: Shutterstock