First-hand observations from a Goldman Sachs Korea trader: South Korean stocks “continued and painful” deleveraging, with “bull” funds remaining silent

Korean stocks were dealt a severe blow, and the driver of this selloff was not a deterioration in fundamentals, but a position purge triggered by leveraged products.

According to the Pursue-the-Trend Trading Desk, in a July 14 market commentary report, Chris Cha, a Goldman Sachs sales and trading representative in Seoul, said that the KOSPI plunged 9% that day to close at 6,800, triggering the seventh circuit breaker since 2026. The core catalyst behind this drop was the concentrated deleveraging of newly listed single-stock leveraged ETFs, not any negative fundamental signals or profit estimate cuts. Foreign capital and local institutions together net sold more than $2.6 billion on the day.

What’s worth noting is that, while the index suffered a sharp pullback, net long-only institutional investors’ response was unusually muted, and large-block trading activity by institutions was unexpectedly lackluster. Goldman Sachs believes the selloff was a "liquidity-driven position purge," not a structural signal of a cyclical top, and advised investors to take advantage of extreme volatility to accumulate high-conviction holdings of storage-chip and technology-related exposures.

Single-stock leveraged ETF deleveraging: the core driver of the crash

The immediate trigger for the KOSPI’s plunge was the escalating situation in the Middle East—tensions between the U.S. and Iran continued to simmer near the Strait of Hormuz—but what truly amplified the decline was the concentrated closing of newly listed single-stock leveraged ETFs.

According to Chris Cha’s report, the 2x leveraged ETF products linked to semiconductors fell more than 30% that day, forcing large-scale gamma rebalancing operations and creating a downward spiral. This mechanism accounted for 62% of the day’s net selling by local institutions. SK hynix and Samsung Electronics fell 15.4% and 10.7%, respectively, but both companies had no negative fundamental catalysts or profit forecast downgrades, indicating that the selloff was driven entirely by positioning factors.

Regulators responded quickly. On the same day, Lee Chan-jin, head of the Korea Financial Supervisory Service, convened CEOs of 20 major asset management companies to discuss the systemic risks of the above products and express strong concern about their "overheated" marketing practices, calling for stronger consumer protection. Current regulatory focus is expected to be on raising product access thresholds rather than directly banning the related products; specific measures have not been issued yet.

Fund flows: Foreign capital offloads passively, long-only institutions hold back

In terms of fund flows, both foreign investors and local institutions were net sellers that day. Foreign investors net sold $1.3 billion, with $1.18 billion coming from programmatic trading—nearly all of it passive selling; local institutions net sold $1.5 billion, mainly concentrated in ETF-related clearing.

Observations from Goldman’s trading desk corroborated this passive-dominated market backdrop: despite the index’s dramatic drop, institutional block trading activity was surprisingly subdued. The report notes that the visible sell orders on the day were mostly driven by systematic, volume-driven hedge funds, while net long institutions remained silent.

Over the past three months, foreign investors have cumulatively net sold $71.5 billion of the KOSPI, with 88% concentrated in the technology sector, as global investors have substantially reduced their positions in the Korean market.

Technical picture: Key support at risk

Technically, the KOSPI closed exactly at 6,800 that day—i.e., the 52-week Fibonacci support level. Since mid-June, the index has been trading within a downward-trending channel and has now reached a key technical inflection point.

If support at 6,800 fails, the next support lies at 6,500 (about a further 4.5% drop from the day’s close), corresponding to the 3-year 38.2% Fibonacci retracement level; below that is the 6,100 to 6,000 zone, about a 10% to 12% decline versus the day’s close. The report said the one-standard-deviation daily trading range for the KOSPI is 2.8%, but in recent sessions the index’s intraday volatility has frequently exceeded two standard deviations, raising the probability of testing that next support zone. In addition, the KOSPI’s 14-day RSI fell to 37.2, nearing oversold territory.

There is a clear divergence between this crash and institutional investors’ fundamental views. Based on feedback collected by Goldman’s sales team during its Singapore roadshow last week, institutional investors generally believe that the prior correction has restored the risk-reward profile for Korean tech stocks to a highly attractive level, and they have already started rebuilding exposure to storage chips.

The core logic of the bullish camp is that a structural equipment shortage is expected to delay industry capacity expansion until the second half of 2028, and that forward earnings-per-share forecasts remain solid even after a sharp price pullback. The minority bearish view worries that the 2026 fourth-quarter average selling price (ASP) could decline, and that there is a risk that the HBM4 cycle has peaked.

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