This year has already triggered circuit breakers seven times! Goldman Sachs trading desk asked in frustration: When will the sell-off in Korean stocks stop?

The Korean stock market suffered one of its worst single-day declines this century, triggering its seventh circuit breaker of the year. Goldman Sachs traders publicly questioned: When will the selling finally stop?

On Monday, the Korea Composite Stock Price Index fell nearly 9% for the day, marking the third-largest single-day drop since the Lehman crisis. The closing fell below the key 6800-point support, and has retraced 27% from the all-time high hit in early June this year.

The seventh circuit breaker this year was triggered that day. Out of the 13 full-market trading halts since the circuit breaker mechanism was established in 2000, over half occurred this year alone.

This drop was mainly led by two companies crucial to the Korean market. Samsung Electronics plunged 10.7%, and SK Hynix plummeted 15.4%, setting a historic record for the largest drop. Both fell 40% from their recent all-time highs.

Goldman Sachs trader Heejae Lee admitted in a report that day:

So far, no truly convincing fundamental catalyst has emerged to explain the current wave of selling.

Leveraged ETF Forced Liquidations Amplify the Decline

One of the key drivers of the extreme intraday volatility was the rapid de-leveraging of newly launched single-stock leveraged ETFs.

Semiconductor-related 2x leveraged products fell over 30% on the day, forcing large-scale re-hedging and further accelerating the downward spiral. Currently, 3x leveraged Korea ETFs have dropped 65% from the all-time high on June 1.

According to Goldman Sachs estimates, forced liquidation in these products accounted for 62% of the total net selling by domestic institutions on the day.

Regulators responded swiftly. On the day, Lee Chan-jin, head of Korea’s Financial Supervisory Service, met with CEOs of 20 major asset management companies, expressing strong concerns over the systemic risks and “overheated” marketing of these products, urging enhanced investor protection.

Reports indicate regulatory focus is expected to center on raising product entry thresholds rather than directly halting them.

Foreign Capital and Institutions Flee Together, Retail Investors Exhausted

Goldman Sachs block trading desk observed that institutional block activity was relatively quiet that day; momentum hedging funds selectively reduced positions, while long-term institutions mostly stayed on the sidelines.

In terms of capital flows, foreign and domestic institutions net sold $1.13 billion and $1.5 billion respectively. Domestic institutions’ selling concentrated on ETF liquidations, while foreign selling was almost entirely from quantitative trading, with net quantitative outflows reaching $1.18 billion.

Even more concerning, retail investor funds, previously the last line of support for Korean stocks, are rapidly approaching their limits. Goldman Sachs data show the margin call ratio on retail margin financing rose to 5% as of last Friday. Considering Monday’s decline, the ratio for Monday will be much higher.

According to the Korea Financial Supervisory Service, as of July 13, more than 1.2 million leveraged retail accounts have received margin call notices, among which about 320,000 to 360,000 accounts have been forcibly liquidated by brokers, wiping out principal, with some accounts even showing negative balances.

Furthermore, as of July 9, the balance of retail broker margin deposits has fallen to 107.1 trillion won, a sharp drop of about 30 trillion won from 132.47 trillion won on June 29, and the lowest level since February 2020.

Goldman Sachs points out that once retail investors’ appetite for “buying dips and chasing rallies” is completely exhausted, the true bottom of the Korea Composite Index may not have arrived yet.

Fundamental Divergence: Institutions Bullish, Capital Votes with Its Feet

Monday's sharp drop formed a stark contrast to the institutional feedback Goldman Sachs gathered during its Singapore roadshow last week.

At that time, the mainstream institutional view was that recent corrections had greatly improved the risk-reward ratio, with a tendency to rebuild exposure to memory chips. However, the market quickly responded with a 9% single-day drop.

The bullish camp logic is supported by structural factors like shortages of equipment capacity, expecting industry expansion to be pushed back to the second half of 2028.

A handful of bears expressed concerns about declines in average selling prices (ASP) in Q4 2026 and the topping out of the HBM4 cycle.

Korea Investment & Securities previously released a report predicting SK Hynix operating profits will reach 60.4 trillion won, up 556% year-on-year, but about 8% lower than consensus expectations of 65 trillion won, largely because HBM’s revenue proportion leads ASP rises to lag the market average.

Worth noting, despite the sharp correction in the Korea Composite Index, forward EPS forecasts continue to be revised down, mainly due to overly optimistic previous earnings forecasts for memory stocks.

Technical Critical Point, Goldman Sachs Cautiously Optimistic

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

Technically, the KOSPI closed exactly at the 6800-point support level, which is the 52-week Fibonacci retracement. If this support breaks, the next support is at 6500 points, implying a further downside of 4.5%.

Lee cited five years of Korean stock index maximum drawdowns of about 30% in history, noting the current -25% decline is “already quite close.”

Goldman Sachs suggests investors use the current extreme volatility to selectively buy high-conviction memory chip and tech stocks at steep discounts.

However, Goldman also concedes that the market faces multiple short-term headwinds.

First is seasonality. The Korea Composite Index historically performs poorly in the third quarter; if gains in the first half are strong, the third quarter becomes a natural window for institutions to lock in profits, rebalance portfolios, and rotate into defensive sectors.

Secondly, there’s the issue of financing costs. Korean banks' financing available to retail investors is near its cap; while swap financing costs have retreated slightly from highs, they remain elevated, and prime brokers are proactively cutting inventory and risk exposure.

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