Woofun AI reports that intense selling pressure has engulfed US high-beta momentum stocks, marking the most severe episode since the COVID-19 pandemic shift in 2020, yet the market has avoided a panic-driven collapse due to significant retail investor support. This dynamic was highlighted in a review by Dong Jing for Wall Street Insights, which noted that while institutional selling was fierce, retail investors acted as the primary stabilizing force.

The market characterization for July 7 was described by Goldman Sachs trader Guillaume Soria as an "ugly day," drawing historical parallels to the transition from the "stay-at-home narrative" to "reopening" during the 2020 COVID-19 pandemic. Although the speed and scale of the current selling wave are comparable to that period, Soria emphasized that the fundamental catalysts present in 2020 are absent in this round, suggesting a different underlying driver for the volatility.

Performance metrics for the momentum factor reveal the depth of the correction. The high-beta momentum factor, tracked by GSPRHIMO, plummeted approximately 6% in a single day, accumulating a decline of over 20% across five days. This trajectory significantly exceeded Goldman Sachs’ initial expectation of a "brief summer correction," indicating that the downward pressure has been more persistent and severe than anticipated by market strategists.

One primary catalyst for this selling wave originated from Samsung’s earnings release. On July 7, Samsung reported preliminary results that, while recording a record operating profit, saw revenue fall slightly short of buyer expectations. This disappointment triggered a sharp reaction in the Korean market, where Samsung’s stock price dropped 9%, sending shockwaves through the global semiconductor supply chain and intensifying risk-off sentiment.

A second critical catalyst emerged from developments in the AI hardware sector. DeepSeek announced plans to develop its own AI chips, a move that intensified concerns regarding the competitive landscape of AI hardware. This news triggered spillover selling across the global AI sector, as investors reassessed the valuation premiums attached to established hardware providers in light of potential new competition and shifting technological paradigms.

Trading volumes in semiconductor and leverage ETFs surged sharply in response to these catalysts. SOXL’s trading volume was 35% higher than the 30-day average, even as the product had already fallen 50% from its all-time high set 10 trading days prior.

Additionally, trading volume related to DRAM was 60% higher than the average, and SMH’s trading volume was 30% higher, reflecting intense activity and position adjustments among traders.

Institutional sentiment has shifted toward selective buying, according to Goldman Sachs’ TMT expert Peter Bartlett. He noted that while the overall fundamental outlook for the tech sector remains positive, buying activity has become more "selective" in recent weeks, showing a significant cooling compared to the frenzied pace in May and early June. Triggers such as SK Hynix raising its guidance and META’s cloud business developments were considered, but the cautious approach underscores a lack of broad-based enthusiasm.

Woofun AI data shows that the core of the current selling is deleveraging rather than new bearish positioning. UBS’ cash trading desk observed that selling pressure mainly came from long-term accounts, while hedge funds engaged in tactical operations, primarily short-covering and selective buying. This dynamic corroborates the view that the market is undergoing orderly risk-off behavior, although UBS warned that continued selling could shift the situation from orderly to panic-driven liquidation.

Technical risks remain elevated despite the absence of panic. The high-beta momentum (GSPRHIMO) and broad AI index (GSTMTAIP) have not entered oversold territory, with gains from the beginning of the year still standing at 23%. From a five-year perspective, relevant positions remain extremely crowded. Goldman Sachs’ trading desk stated that without upward catalysts, there is room for further selling, noting that July is historically one of the worst months for the momentum factor.

Morgan Stanley strategist Michael Wilson previously proposed a theme of "continued market expansion," which is partially reflected in the breadth of support, with 283 components in the S&P 500 index closing higher on that day.

However, Goldman Sachs’ historical data indicates that the maximum historical pullback for this factor was roughly twice the current decline. If market leadership changes, the decline could widen significantly, as the factor has not yet reached its historical bottom.

Retail investors have emerged as the most prominent structural feature of this market cycle, providing crucial support. Goldman Sachs’ data shows that retail investors switched to net purchases during the session, with the net inflow reaching the 90th percentile in nearly three years by the end of the day. This contrarian buying has helped stabilize the market, preventing a deeper collapse despite the intense institutional selling.

Goldman Sachs trader Guillaume Soria remains cautious about labeling the 20% five-day decline as a "healthy correction." He noted that after a strong 57% performance in the first half of the year, extreme positions in the momentum factor have been reset from their all-time highs a month ago to the 60th percentile over the past year. While overall performance remains strong, Soria believes we may be in the "later stage" of this adjustment cycle, warning that if negative news widens cracks into chasms, it could evolve into a deeper correction.