The South Korean market was the first to change course, as a momentum trade reversal sweeps across Asia.

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The momentum trading that dominated Asian stock markets in the first half of the year is collapsing, with South Korea at the epicenter of this reversal.

The downward trend of the Korea Composite Stock Price Index (Kospi) is deepening, with 30-day volatility rising to a historic high, indicating there is further room for losses to expand. According to Bloomberg, forced selling pressure from leveraged ETFs, continued foreign capital outflows, and the backlash from retail investors increasing leverage have together formed the core driving forces of this momentum meltdown.

The impact of this reversal has spread across the entire Asian technology sector and is being transmitted to global chip stocks. The Philadelphia Semiconductor Index (SOX) has fallen more than 18% from its June high, and Japanese stocks have similarly experienced net foreign outflows year-to-date. The shift in market sentiment is reshaping the region's entire capital landscape.

The Peak and Turning Point of Momentum Trading

In the first half of 2026, the momentum factor was the undisputed king in the global factor investing space, especially in Asian markets. Bloomberg Markets Live strategist David Savage pointed out that June may have marked the peak for momentum trading in Asian equities.

At that time, the periodic rebalancing of major global indices brought in a raft of price-insensitive buying for stocks that strongly aligned with the current AI theme. The SpaceX IPO further ignited retail investor enthusiasm, triggering a wave of chasing gains across Asian markets. Stocks like SpaceX and Marvell Technology, newly included in benchmark indices, are now undergoing mean-reversion corrections.

As the rebalancing window closed, the structural buying that had supported momentum trading faded, abruptly shifting the trend from "tailwind" to "headwind."

Foreign Capital Outflows, Retail Investors Stepping In Cause Hidden Dangers

The massive outflows of foreign capital have already made Asian markets highly dependent on retail money. Year to date, overseas funds have sold more than $100 billion worth of Korean equities—a remarkable scale given both markets surpassed the $5 trillion market capitalization mark in June, ranking among the world's top eight exchanges, overtaking the UK and Canada.

Retail investors have filled the gap left by exiting foreign capital, especially in the Korean market. Unlike active and passive funds, which are bound by position constraints and must periodically trim profitable holdings, retail accounts can hold strong stocks long-term or even increase positions during declines, further amplifying momentum effects. However, this behavior can also compound losses exponentially during reversals.

Leveraged ETFs: From Boosting Gains to Amplifying Risks

Retail investors used leveraged ETFs and margin buying to amplify their bets, but these tools have now shifted from being core products of momentum trading to the main sources of market risk.

Take memory chip giant SK Hynix as an example: its single-stock leveraged ETF holdings are highly concentrated. In late May, South Korea approved multiple single-stock leveraged ETFs tied to SK Hynix and Samsung Electronics for domestic listing, quickly attracting large capital inflows and causing the scale of related products offering double daily returns to surge. At its peak, just three SK Hynix leveraged ETFs had combined assets exceeding $23 billion—over 2.5 times the stock’s average daily trading volume.

These products use swaps and options to maintain 2x daily leverage. When the underlying stock price falls, the funds must sell holdings to restore their leverage ratio to target levels, triggering mechanical and passive selling. This forced liquidation mechanism was concentrated in July, becoming a key factor in suppressing market momentum and accelerating sector rotations.

Korean regulators have responded by suspending new single-stock ETF listings and strengthening oversight of such product trades to curb market volatility.

Geopolitical Risks Reignite, Asian Markets Face Pressure from All Sides

The internal collapse of momentum trading is happening in tandem with a deteriorating macro environment. The macro conditions that previously supported outperformance of the momentum factor—lower cross-asset volatility, resilient global growth, and falling oil prices—are reversing.

Renewed U.S.-Iran military conflict has sent oil prices higher and strengthened the dollar, while expectations of global rate hikes have intensified again. Asian stocks are particularly sensitive to tightening financial conditions and the repricing of geopolitical risks, facing clear pressure in this adjustment round.

The Kospi's 30-day realized volatility has reached a new historic high, signaling that the recent downtrend still has momentum to extend further and could continue to drag down overall Asian market sentiment, even spreading to global chip stocks. The momentum reversal, starting in South Korea, is propagating to broader markets.

Risk Warning and DisclaimerThe market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not consider the specific investment objectives, financial status, or needs of individual users. Users should assess whether any opinions, viewpoints, or conclusions herein are appropriate to their circumstances. Investment is at your own risk. ```