Short positions in the Korean market stand at a three-year high, skewing risk to the upside

Sentiment towards semiconductor stocks has swung from extreme bullish to extreme bearish in little more than a month

Throughout July, the most extreme shifts in investor positioning were registered in Asia.

It was positioning in South Korea's equity market that the most dramatic adjustments took place as its benchmark index reversed into bear-market territory with long positions liquidated and new shorts initiated. Now, Citi research analyst David Chew believes "short-positioning has become sufficiently one-sided that any stabilization in AI sentiment could trigger a short-covering rally."

Chew illustrated the extent of the bearish acceleration in sentiment shift in an update to his equity markets positioning model published on Monday. He writes that a short-squeeze set up is developing, as shorts sit at a three-year high. The Kospi index KR:180721 lost 22% in July. That index, which in late June was up some 116%, is now up 51% on the year.

The short positions are in-the-money or profitable at present, though, so it's positioning concentration rather than being caught offside that would force traders to rein in their exposure.

Shorts are building in South Korea

The question, then, is what could change sentiment. It's still possible that AI capex may turn out higher than even the already lofty growth that has been seen so far. Bank of America's tech team, in a note authored by Vivek Arya and three colleagues, upgraded hyperscaler spending forecasts to $860 billion for 2026 and $1.2 trillion for 2027 and now sees customer commitments standing at $2.3 trillion by the end of 2027, from $2 trillion barely a month ago.

Companies providing the compute, the memory and the power are all expected to benefit from this spending.

What people tempted to invest in semiconductor stocks like SK Hynix (KR:000660), Samsung Electronics (KR:005930), Taiwan Semiconductor Manufacturing Company (TW:2330) or Micron $(MU)$ may find comforting is that Arya and team forecast the return-on-investment for the hyperscalers like Alphabet $(GOOG)$, Microsoft $(MSFT)$ and Amazon (AMZN) to start improving in 2028, reinforcing the need to sustain the capex now.

Moreover, debt financing concerns for the hyperscalers are overplayed, according to Arya. The financing is long-term so allows for flexibility, and there is still ample access to capital markets. One of the concerns that drove down the Philadelphia Semiconductor Index SOX more than 20% in July was uncertainty whether the hyperscalers would be able to afford their ongoing expansion into data centers and AI infrastructure buildout. Arya is telling investors that it will.

Much of the focus of investors in semiconductor stocks of late was occupied by SK Hynix (SKHY) (KR:000660) after its mammoth $29 billion equity offering on Nasdaq in July. The American depositary receipts have been wildly volatile, trading between a high of $194 and a low of $124 in just a month.

Analyst CJ Muse and team at Cantor Fitzgerald initiated coverage with a buy recommendation and a price target of $300, more than double Monday evening's closing price in the U.S. Like Bank of America's analyst team, Muse and his colleagues forecast the SK Hynix growth to be longer-lasting than recent share price behavior might imply:

"The memory trade is alive and well, driven by significant demand for AI infrastructure as generative, agentic, and eventually physical AI proliferates. We see these drivers leading to bit demand for both DRAM and NAND well in excess of supply into CY29, if not longer."

One note of caution for the chip makers, though. One other factor undermining the sector recently has been the threat of cheaper competition from Chinese manufacturers like recently-floated CXMT (CN:688825) that now claim about 7% market share globally. Switched on media sources like The Information are reporting that major personal computer and smartphone manufacturers in the U.S. are starting to use CXMT memory chips.

A separate report from Bloomberg also points out that CXMT is narrowing the gap between its chips and the state-of-the-art offerings of Samsung and SK Hynix.

-Jules Rimmer