This year, 7 circuit breakers have already been triggered. Goldman Sachs’ trading desk is “frustrated” and asks: when will the selling off in Korean stocks stop?

Original author: Bao Yilong

Original source: Wall Street Insights

South Korean stocks suffered one of the most brutal single-day declines since the beginning of this century, triggering the seventh circuit breaker this year. A Goldman trader publicly asked: When will the sell-off finally stop?

On Monday, the Korea Composite Stock Price Index fell nearly 9% on the day, marking the third-largest single-day drop since the Lehman crisis. By the close, it fell below the 6,800-point key support level, with a cumulative pullback of 27% from the all-time high set in early June this year.

The day’s decline triggered the seventh circuit breaker of the year. Among the 13 times the entire market has been shut since the circuit-breaker mechanism was introduced in 2000, this year alone already accounts for more than half.

The sell-off was mainly led by two companies crucial to the Korean market. Samsung Electronics plunged 10.7%, while SK Hynix fell 15.4%, recording the largest drop in history and down 40% from its all-time high just a few weeks ago.

In a report on the day, Goldman trader Heejae Lee admitted:

So far, we haven’t heard any fundamental catalyst that can convincingly explain the real drivers behind this round of selling.

Forced liquidation of leveraged ETFs amplifies the sell-off

One of the key drivers of the extreme intraday volatility on the day was the rapid deleveraging of recently listed single-stock leveraged ETFs.

Leveraged products tied to semiconductors with 2x exposure fell more than 30% on the day, forcing large-scale re-hedging and accelerating the downward spiral. The 3x leveraged Korea ETF is currently down 65% from its all-time high on June 1.

Goldman estimates that the forced liquidation activity of the above products accounted for 62% of total net selling by domestic institutions on the day.

Regulators responded immediately. On the same day, Lee Chan-jin, chairman of the Financial Supervisory Service of Korea, met with the CEOs of 20 large asset management companies to express strong concern about the systemic risks and “overheated” marketing of the aforementioned products, calling for stronger investor protection.

According to reports, regulatory focus is expected to be on raising product entry thresholds rather than directly halting them.

Foreign capital and institutions team up to exit; retail investors run out of steam

Goldman’s commodities and block trading desk observed that institutional block trading activity was relatively quiet on the day. Momentum hedge funds cut positions selectively, while long-term institutions largely stayed on the sidelines.

On the funding side, foreign investors and local institutions were net sellers of $1.13 billion and $1.5 billion on the day, respectively. Local institutions’ sell orders were highly concentrated in ETF liquidation, while almost all foreign investors’ sell orders came from quant trading, with quant net outflows reaching $1.18 billion.

What is even more alarming is that retail funding—which had long been the final support force for Korean stocks—is rapidly hitting its limit. Goldman data shows that the margin call ratio for retail financing guarantees had already risen to 5% as of last Friday. Given Monday’s decline, Monday’s figure will be significantly higher.

According to disclosures by the Financial Supervisory Service of Korea, as of July 13, more than 1.2 million leveraged retail accounts in the Korean market had received margin call notices, with about 320k to 360k accounts already being forcibly liquidated by brokerages, leaving principal at zero. Some accounts even show negative balances.

In addition, as of July 9, retail brokerage margin deposit balances had fallen to 107.1 trillion won, down sharply by about 30 trillion won from 132.47 trillion won as of June 29, the lowest level since February 2020.

Goldman said that once retail investors’ willingness to “buy the rally and sell the decline” is completely exhausted, the true bottom of the Korea Composite Index may not have arrived yet.

Divergence on fundamentals: institutions are bullish, but money votes with its feet

Monday’s急跌 came in sharp contrast with the institutional feedback Goldman collected during its Singapore roadshow last week.

At the time, the mainstream view among institutional investors was that the recent adjustment had significantly improved the risk-reward ratio, and they tended to rebuild exposure to memory chips. However, the market immediately responded very differently with a 9% drop in a single day.

The bullish camp’s logic is supported by structural factors such as equipment capacity shortages, with industry capacity expansion expected to be delayed until the second half of 2028.

The minority bearish camp expressed concern about a fall in the average sales price (ASP) in the fourth quarter of 2026 and that the HBM4 cycle may have peaked.

Korea Investment & Securities previously issued a report predicting that SK Hynix’s operating profit would reach 60.4 trillion won, up 556% year on year, but about 8% below the market consensus of 65 trillion won. The reason given was that a higher share of HBM revenue led to the ASP increase being smaller than the market average.

Worth noting is that although the Korea Composite Index has pulled back sharply, forward earnings per share expectations are still being revised downward. To a large extent, this stems from memory stocks having been too optimistic in their earlier earnings forecasts.

Technical levels at a critical juncture; Goldman stays cautiously optimistic

Based on the above analysis, Goldman categorized this round of KOSPI declines as a “liquidity-driven position cleansing.”

From a technical perspective, the KOSPI closed on the day right at the 6,800-point support level, which coincides with the 52-week Fibonacci retracement level. If this support fails, the next support level will be at 6,500 points, meaning there is 4.5% further downside.

Citing historical data showing that the maximum drawdown of the Korea Composite Index over the past five years was about 30%, Lee pointed out that the current decline of -25% is already “quite close.”

Goldman recommends that investors take advantage of the current extreme volatility to selectively buy memory chips and technology-related assets at deep discounts with high conviction.

However, Goldman also acknowledges that in the short term the market still faces multiple headwinds.

First is seasonality. Historically, the Korea Composite Index has performed weakly in the third quarter. If the first-half rally is strong, then the third quarter naturally becomes a window period for institutions to lock in gains, rebalance portfolios, and rotate into defensive sectors.

Second is the issue of financing costs. Korean banks’ financing loans available to provide funding to retail investors are approaching their limits. Although swap financing costs have eased slightly from their peak, they remain elevated, and the lead brokers are actively reducing inventory and risk exposures.