Korean Traders Are Primed to Sell Overheated Stock Leaders

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South Korea’s highest-flying stocks are starting to come back down to earth.

The nation’s small-cap Kosdaq index tumbled as much as 5.4 percent on Wednesday, the biggest intraday drop since June 2013, amid the largest volumes in five years. It ended the day down 1.6 percent, paring this year’s gain to 30 percent.

For Assetplus Investment Management Co. and Mirae Asset Securities Co., Wednesday’s brief tumble was a reminder of how vulnerable Korea’s small-cap stocks are to a pullback after surging three times faster than the benchmark Kospi index this year. Valuations for Kosdaq shares have climbed to the highest level since 2008 as individual investors piled in on speculation President Park Geun Hye’s economic stimulus and push for more entrepreneurship will fuel gains.

Investors are “ready to sell when they see some trigger,” said Lee Jae Hun, a Seoul-based strategist at Mirae Asset Securities, the nation’s sixth-largest brokerage by market value. “Market anxiety is growing about valuations after the steep jump. We are about to see a correction as people get more cautious on the Kosdaq.”

The index’s price-to-book ratio reached 1.68 on Tuesday, the highest since June 2008, according to data compiled by Bloomberg. The 14-day RSI on the Kosdaq, whose companies have a median market value of $76 million, was 73 on Wednesday, above the 70 threshold that some traders use as a sign that gains have been too fast. The stock gauge fell 1.5 percent at the close of trading in Seoul.

Correction Signal

“I take this as a healthy correction signal,” Choi Kwang Wook, the chief investment officer at Assetplus Investment, which oversees about $4.9 billion, said by phone in Seongnam, South Korea. “There has been herd behavior in the market, especially in the health and bio-related sectors in the Kosdaq. People will become more prudent. The market is now overvalued and overheated.”

Foreign investors sold 65.6 billion won ($60.5 million) more of Kosdaq-listed shares than they purchased on Wednesday, even as they bought more Kospi shares than at any other time since September 2013.

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