AI bull market overheated? US stock market funds begin to "hit the brakes," next wave depends on whether Korean stocks will experience FOMO

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AI stocks accelerated again last week, but several quantitative signals are already flashing warnings: the Nasdaq is displaying a combination of “spot prices rising, volatility rising,” VIX continues downward, while VXN has rebounded noticeably; the skew in US tech stock options has dropped sharply, and the process of quantitative funds covering their shorts is nearing its end. In other words, AI trades in US stocks are not considered over yet, but there’s less fuel left to push prices higher via short-covering.

A core judgment from Nomura’s May 11 research report is direct: “At least for US stocks, the AI rally may be taking a breather.” But this framework doesn’t place the reversal signal on the Nasdaq itself, but rather on the South Korean stock market: If South Korea’s market experiences a renewed FOMO, it could indicate that AI trades still have more room for chasing gains.

Signals in the South Korean market are even clearer than in the US. Non-resident investors, who increased their holdings of Korean stocks during the AI rally last September and October, have recently taken profits as the market surged; at the same time, KOSPI 200 also shows "spot prices rising, volatility rising," but the skew in call options has not increased. This does not look like a volatility expansion driven by demand for call options. Whether foreign capital selling indicates bearish sentiment or is just clearing space to add longs later can’t be concluded simply yet.

Clues from the Japanese market are more structural: AI and semiconductors still dominate export-oriented stocks, but value preference hasn’t disappeared, being more retained in domestic demand stocks. The bottom anchor for Nikkei 225 has also been raised, with target-based estimates for component stocks moving from the 60,000–61,000 range at the end of February to above 66,000; however, if the Nikkei falls below 61,500, both CTA position reduction and option traders turning negative gamma may pressures may emerge at the same time.

The US AI rally isn’t over, but short-term short-covering fuel is running out

The skew in US tech stock options has dropped to near historical lows, returning to levels seen around October 2025. Here, skew refers to the difference between the implied volatility of 1-month 25-delta puts and 1-month 25-delta calls. A sharp drop in skew means the premium for downside protection over calls has been compressed, making the market pricing for tech stock upside more crowded.

The supply-demand picture is no longer as favorable as before. Quant funds’ stock exposure has returned to near neutral, with the prior forced buying and short-covering largely completed. If AI stocks keep rising, the main force can no longer rely on “shorts being squeezed to buy.”

It’s important to note that positions related to quant funds, CTAs, macro funds, etc., are model estimates, not actual measured holdings. This makes them more suitable as a gauge for marginal changes than as precise position tables.

Foreign selling in Korean stocks isn’t necessarily bad news

The challenge with Korea’s market is that the same data set can be interpreted in two ways.

On one hand, non-resident investors are selling. Last September–October, this group increased exposure to Korean stocks during the AI rally; recently, after a surge in the Korean market, they started locking in profits. In terms of capital flows, this is a relatively cool signal.

On the other hand, the skew in KOSPI 200 call options has noticeably declined, suggesting volatility isn’t being driven by demand for chasing calls. In other words, Korea’s market hasn’t entered the typical “fear of missing out, rush for calls” state. If AI trading is to continue, Korea actually retains space for renewed FOMO.

Macro assumptions still can’t avoid the Strait of Hormuz. As long as the strait remains blocked and the US and Iran still differ on ceasefire terms, the AI-dominated market environment may last longer than expected.

The real risk is elsewhere: renewed inflation concerns forcing global central banks to turn more hawkish. The event premium for the US CPI on the 12th this week remains low, and the market hasn’t paid significant insurance for this risk yet.

The stronger AI gets, the more Japanese value stocks need to exclude export exposure first

US investors remain heavily exposed to AI trades, AI-related ETFs continue to see inflows in the US, while outflows are seen in Europe and other regions. This regional sentiment difference has been transmitted to Japanese stock picking.

In the reversal rally of November–December 2025, Japanese AI and semiconductor stocks with high US ownership performed more defensively; those with higher European ownership continued to underperform. In some sense, high US ownership has become a cushion against reversal risk.

But if tech stocks experience a more thorough reversal, the value style could again become the main line. In the past year, Japan’s market showed a rhythm: when tech stocks led the index upward, value factors were weak; when tech stock rallies paused, value factors recovered.

A more actionable approach isn’t just broadly buying value but tilting toward value within domestic demand stocks: go long high B/P stocks in TOPIX 500 domestic stocks, short low B/P stocks. This combo still brings slight excess returns, similar to last September–October. Most AI and semiconductor stocks are export assets, and the supply chain risk from Middle East tensions weighs mainly on export stocks; excluding exports, value preference still exists in Japanese equities.

If Hormuz normalizes, laggards have room to catch up

If the Strait of Hormuz returns to normal, stocks previously lagging due to Middle East risk may be repriced. Using TOPIX 500 as a sample and dividing stocks by returns from February 27 to April 7, the spread between the bottom 20% “losers” and top 20% “winners” has begun to narrow, but still less than halfway recovered.

Historical supply chain shocks provide two paths.

After tariff shocks in 2025, the market quickly pivoted from initial selling to betting Trump would compromise, the so-called “TACO trade.” Two months after the index itself fully recovered, the spread between winners and losers from the shock also fully converged. After the 2020 pandemic shock, about six months after index recovery, the winner–loser spread was basically erased.

The 2022 Russia–Ukraine conflict played out differently. Oil prices stabilized after an initial surge, but global central banks hiked rates, economic momentum weakened, and the winner–loser spread only narrowed halfway before stalling. Laggards in that shock were mainly export stocks, with median domestic sales at 37%; winners were mostly domestic stocks, median domestic sales at 84%. If this Middle East crisis eventually drags global growth, laggard bounce-back may also stall halfway.

Nikkei’s upper anchor lifted, 61,500 is the key support

Nikkei 225 broke above 63,000 this Monday. The index’s upward move isn’t entirely driven by sentiment—concentrated contributions from heavyweights are clear: the top 5% in weighting alone added about 5,000 points, many being AI-related stocks relatively unaffected by the Middle East situation.

Based on bottom-up estimates of Nikkei 225 component stocks’ 12-month forward target prices, the anchor has been raised from 60,000–61,000 at the end of February to above 66,000 now. This is more like the current upper anchor, and could also act as short-term resistance.

Fund sentiment isn’t showing obvious shifts. European investors haven’t rushed to restart “fleeing dollar assets” trades; macro hedge funds remain mostly on the sidelines for US and Japanese stocks; CTA long exposure to Japanese stocks is only slightly increased.

The key level to watch is 61,500. If Nikkei 225 falls below this, CTAs may start cutting overall net longs; likewise, below 61,500, option market makers’ gamma exposure would likely turn negative. If the index continues rising and call option skew strengthens, market makers could turn negative gamma as prices climb, amplifying volatility faster.

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