Beware Of The Head Fake That The KOSPI May Have Shown...

By many traditional metrics, the South Korean stock market (as measured by the KOSPI) last week showed strong signs of a rebound. The KOSPI rose about 4.3%. The index last week soared above its 200-day, 100-day and 50-day moving averages. The RSI (Relative Strength Index), while having moved higher to around 54 was still comfortably below the overbought signal value of 70.

And the MACD (as shown below from Excalibur Pro) generated a buy signal on the South Korean stock market as the histogram on the MACD chart, sitting below the mid-level line, began to move upwards last week.

Even our Markov Process outputs have been showing bullish signals for the KOSPI, especially since the around the middle of January when Markov signals became very bullish (Markov was a couple of weeks ahead on this one).

So what is there to worry about? Just because a lot of signals go higher, you should think lower? Not necessarily but there are a couple of other metrics worth keeping in mind before becoming a KOSPI bull right now. Volatility, as measured on a one-month rolling basis, did creep higher last week. This is worth watching because higher volatility is often associated with market declines.

And while there was some euphoria by equity investors in Korea, the currency (Korean Won) rose only 0.3%.

It is also worth noting that the KOSPI was very highly correlated last week with two other important Asian stock markets - Hong Kong and Japan. The Asian markets in general are floating higher and lower with the news cycle out of China and specifically the impact the coronavirus will continue to have on other Asian economies. The virus outbreak led Beijing to extend a suspension order for local Chinese manufacturers until this coming week (one usually that runs the length of the Chinese New Year) as a means to help contain the virus. If Beijing lifts that suspension order, it is generally seen as good supply-chain news for companies in countries that rely on Chinese parts for the products they make. But if Beijing extends the manufacturing suspension, financial markets will likely suffer.