South Korea is Predicting the NASDAQ’s Next Move

South Korea’s stock market is now bigger than Canada, India, Germany, and Taiwan.

The crazy part is that the KOSPI got to this position in less than six months, and was driven by only two companies:

You may have heard of them, and if you have then you know the entire rally is based on the memory run that’s also affecting American equities.

Whether Korea has enough behind its economy to be placed above these other powerhouses is up to interpretation.

What I don’t find logical is that an entire country’s financial market is driven this high, and this fast, by only two companies.

But that’s not even the worst part.

It’s average true range (ATR) readings have gone from a 1% average up to 8% in recent weeks.

We’ve all seen the Twitter news, South Korea swinging as much as 10% in any given day.

Up until Friday, I wasn’t paying that much attention to the South Korean situation.

What changed my mind was the correlation effects now seen in the EWY (Korean ETF) and the SPY (S&P 500 ETF.)

They have both become pegged since April, with one big caveat:

However,

The US stock market is now diverging from the VIX as seen in the green line above.

Each time this relative strength diverges in this way, a selloff comes about, and I believe this time the effect can be amplified due to the KOSPI relationship.

The question is:

Why is the S&P 500 suddenly correlated to the KOSPI?

Where else do you see a tech CEO reach celebrity status?

Everyday South Koreans lined up on the streets to take pictures of Jensen Huang, and there’s a very clear reason behind the fame:

Why else would a chipmaker CEO be so internationally famous?

I mean, I’ve seen pictures of Steve Jobs among a crowd and not drawing nearly as much attention as Jensen…

The reason I say this is why he’s become famous in Korea specifically comes down to this chart:

There’s an all-time high level of leveraged bets going on in South Korea right now.

Nearly 40 trillion Won ($26 billion USD) are riding behind these bets in the KOSPI.

Which, mind you, is made up by Samsung and SK Hynix.

In a country where the average monthly salary is roughly $2,600 this represents roughly one month of people’s salary embedded into these bets.

Meaning,

You would be risking your rent, groceries, and other expenses money to buy a triple-levered ETF whose value relies on only two companies.

And,

Those two companies rely solely on the AI trade continuing to push higher on sentiment, not actual figures.

This AI accounting analysis breaks down why this might be a bigger risk than most people realize.

Back to Jensen Huang,

As the South Korean population bets a rising share of their net worth in leveraged bets, Jensen Huang (and NVIDIA) influencing companies like Samsung and SK Hynix are the biggest difference maker between Lamborghini money and job hunting.

There’s more…

Talks of concentration in the S&P 500 have circled the media recently.

Roughly 45% of the index is now made up of tech and AI-related stocks, and that’s when previous bubbles tended to peak.

In South Korea, it’s a lot worse.

Mechanically speaking, this isn’t a market that can be sustained, especially with the amount of leverage that’s backing current valuations.

So, let me set the stage:

Now comes the important part, so pay attention.

The U.S. is the backstop to all of this.

Margin loans have to be backed by something…

And brokers have chosen to back these loans through US stock holdings, which now represent upwards of $600 billion.

Because normal regulations require any margin loan to carry 40% of its value in collateral, the math roughly checks out to $1.5 trillion in KOSPI bets circling right now.

So, why does this matter to U.S. investors?

The S&P 500 (the collateral) is 45% concentrated in a single tech and AI-related trade, while the KOSPI is over 95% concentrated in the same bet.

Let’s not even account for Taiwan, Japan, and other markets betting hundreds of billions in the same bet.

This very quickly transforms into a dozen trillion or so riding behind one bet.

And,

It all relies on NVIDIA’s circular financing, where a very specific IRS code is soon to kick in and bring the entire house of cards down.

I broke that outcome for you here in our Offside Premium post here.

Let’s assess the damage here:

And people are already betting on this outcome.

Over 40,000 put option contracts have been opened in the EWY ETF, betting it will fall to (or below) $165 per share by July 2026.

The second leg of this put spread shows 22,000 puts for the same date targeting $90.

That’s a big bet for the entire South Korean stock market.

If these traders are right, we could see that 10-15% drop in the S&P 500 in July due to the collateral association to Korean forced liquidations.

If you’re a high risk-taker, then tagging along these EWY puts would be a cheap way to get a lottery ticket.

However,

I wouldn’t advice placing more than 1-2% of your account in those puts, which now trade at:

Let’s check back in July and see how these puts are trading.

For my less adventurous investors…

Check out yesterday’s weekly primer and read over which factors are beginning to break out.

These are:

Based on that behavior, and the potential pending rotation to be triggered by the Korean liquidations, I would recommend you check out the current US holdings in the Offside Portfolio.

That portfolio is updated through every morning digest.

In the meantime, here’s the latest video series from Jordi Visser, who seems to be an authority around breaking down the AI trade to retailers right now.

The hyperscaler break away from semis and memory means a whole lot more than you think, as we already covered last week.

Click here to read our hyperscaler vs semis report.

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.