The Taiwan stock market has recently shown signs of volatility, with the previously strong short squeeze rally appearing to lose momentum. The significant drop in U.S. stocks and the rising VIX fear index have cast a shadow over Taiwan's market. However, while TSMC experiences a pullback, CoWoS-related stocks have unexpectedly surged, becoming the new market spotlight.

Short Squeeze Warning Signals Emerge as Market Enters Correction

In early May, analysts had pointed out that the current Taiwan stock rally was primarily driven by short squeeze effects. However, such rallies inevitably end, typically marked by expanding trading volumes. The recent 1.2% drop in the S&P 500, accompanied by significant volume and widespread declines among tech giants, has sounded the alarm for the conclusion of this short squeeze phase.

The Taiwan Weighted Index closed down 132 points at 21,670, briefly falling below its five-day moving average during the session. Notably, trading volume contracted, suggesting the decline was more influenced by U.S. market weakness than by local selling pressure. With U.S. Treasury yields climbing to 4.6% and the VIX fear index breaking above 20, risk aversion has increased, driving capital toward defensive stocks and those with lower valuation bases while prompting profit-taking in previously high-flying shares.

Potential Trump Tariff Policy Looms as Risk Factor

Beyond technical and sentiment indicators, fundamental challenges are emerging. The Trump administration has indicated it will detail new semiconductor tariff policies in June, potentially impacting Apple's supply chain and the broader tech sector. Despite the market entering a consolidation phase, institutional investors haven't exited en masse but rather adopted a rotation strategy between sectors.

Three Key Sectors Remain Focus Amid Rotation

The initial market rally was led by AI server stocks like TSMC, Wistron, and Quanta Computer, supported by government stabilization funds. As the market entered a sector rotation phase, analysts maintained focus on three primary sectors, adjusting positions accordingly. Notable successful trades included thermal solution providers Auras and Delta Electronics, along with TSMC equipment suppliers like Marketech, Gudeng, and Hermes-Epitek.

Particularly striking has been the performance of TSMC equipment stocks, with Hermes-Epitek breaking through the NT$1,200 mark after being accumulated below NT$1,000. Marketech also saw strong buying interest following analyst alerts.

CoWoS-Related Stocks: Time to Buy or Take Profits?

With CoWoS-related stocks surging collectively, investors face the dilemma of whether to chase the rally or take profits. Market analysts emphasize that careful examination of ownership structures is crucial before making decisions. Current data suggests Taiwan's market ownership and trading volumes remain relatively stable. While the COMPUTEX exhibition is concluding, potential for further short squeezes persists in the Taiwan market.

Foreign investors continue accumulating select small and mid-cap equipment stocks, indicating no synchronized withdrawal between domestic and foreign capital. Stocks rising recently have primarily been those related to COMPUTEX themes or benefiting from early restocking. Analysts recommend maintaining focused portfolios while closely monitoring ownership changes.

Investment Strategies for Volatile Markets

Given current market conditions, analysts suggest the following approaches:

• Selective stock picking with concentrated positions: Focus on fundamentally strong companies with growth potential rather than following trends.
• Close monitoring of ownership changes: Track institutional activity and stock concentration to adjust strategies promptly.
• Controlled positioning with flexible trading: Maintain appropriate position sizes and adapt to market fluctuations.
• Buying on dips with patience: Accumulate quality stocks during pullbacks and hold for long-term value realization.

As Taiwan's market enters a period of consolidation, investors should maintain composure, conduct rational analysis, and develop strategies aligned with their risk tolerance. Avoid emotional trading decisions that could lead to unfavorable outcomes.