The South Korean stock market experienced one of its most severe single-day declines this century, triggering its seventh trading suspension of the year, prompting a Goldman Sachs trader to publicly ask: when will the selling finally stop?

On Monday, the KOSPI index closed down nearly 9%, marking its third-largest daily drop since the Lehman crisis, falling below the critical support level of 6800 points. The index has now retreated 27% from the all-time high set in early June.

This triggered the seventh market-wide trading halt of the year. Since the circuit breaker mechanism was established in 2000, there have been 13 such suspensions, with more than half occurring in this year alone.

The decline was led by two companies crucial to the Korean market. Samsung Electronics Co., Ltd. plunged 10.7%, while SK Hynix Inc. plummeted 15.4%, its largest-ever single-day drop, now down 40% from its record high a few weeks ago.

Goldman Sachs trader Heejae Lee stated frankly in a report that day: So far, no truly convincing fundamental catalyst has been identified to explain this round of selling.

Leveraged ETF Forced Liquidations Amplify Decline

A key driver of the extreme intraday volatility was the rapid deleveraging of recently launched single-stock leveraged ETFs.

A 2x leveraged product related to semiconductors fell over 30% on the day, forcing large-scale re-hedging that further accelerated the downward spiral. A 3x leveraged Korea ETF has now fallen 65% from its June 1st peak.

Goldman Sachs estimates that forced liquidation activities from these products accounted for 62% of the total net selling by local institutions that day.

Regulators responded swiftly. Lee Chan-jin, the head of South Korea's Financial Supervisory Service, met with the CEOs of 20 major asset management firms, expressing serious concern over the systemic risks and "overheated" marketing of these products and calling for enhanced investor protection.

Reports suggest regulatory focus is expected to center on raising product entry barriers, rather than an outright ban.

Foreign and Institutional Investors Flee, Retail Buying Power Exhausted

Goldman Sachs' block trading desk observed relatively subdued institutional block trading activity, with momentum hedge funds selectively reducing positions and long-term institutions largely staying on the sidelines.

In terms of fund flows, foreign and local institutions were net sellers of $1.13 billion and $1.5 billion, respectively. Local institutional selling was heavily concentrated in ETF liquidations, while foreign selling was almost entirely driven by quantitative trading, with net quant outflows reaching $1.18 billion.

More alarmingly, retail investors, who had been the last line of support for Korean stocks, are rapidly reaching their limits. Goldman data shows the retail margin call ratio had risen to 5% as of last Friday, and considering Monday's drop, that figure would be significantly higher.

According to disclosures from the Financial Supervisory Service, as of July 13, over 1.2 million leveraged retail accounts in Korea had received margin calls, with approximately 320,000 to 360,000 accounts already forcibly liquidated by brokers, wiping out their principal, with some even showing negative balances.

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

Goldman Sachs notes that once the willingness of retail investors to "buy the dip" is completely exhausted, the true bottom for the KOSPI may not yet have been reached.

Fundamental Divergence: Institutions Bullish, Money Votes with Its Feet

Monday's sharp decline stands in stark contrast to feedback Goldman Sachs gathered from institutions during a roadshow in Singapore last week.

At that time, the prevailing view among institutional investors was that recent adjustments had significantly improved the risk-reward ratio, and they were inclined to rebuild exposure to memory chips. However, the market responded with a 9% single-day drop.

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

A minority bearish view expresses concerns about average selling price (ASP) declines in Q4 2026 and the peaking of the HBM4 cycle.

Korea Investment & Securities Co., Ltd. previously issued a report forecasting SK Hynix's operating profit at 60.4 trillion won, a 556% year-on-year increase, but about 8% below the consensus estimate of 65 trillion won, citing the high proportion of HBM revenue leading to a lower-than-average ASP increase.

Notably, despite the KOSPI's significant correction, forward earnings per share estimates continue to be revised downward, largely due to previously overly optimistic profit forecasts for memory stocks.

Technical Levels at Critical Juncture, Goldman Maintains Cautious Optimism

Synthesizing the above analysis, Goldman Sachs characterizes this KOSPI decline as a "liquidity-driven position washout."

From a technical perspective, the KOSPI closed exactly at the 6800-point support level, which aligns with the 52-week Fibonacci retracement level. If this support fails, the next level would be around 6500 points, implying a further 4.5% downside.

Lee cited historical data showing the KOSPI's maximum drawdown over the past five years was around 30%, pointing out that the current -25% decline is "already quite close."

Goldman Sachs advises investors to use the current extreme volatility to selectively purchase high-conviction memory chip and tech stocks at significant discounts.

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

First is seasonal patterns. The KOSPI has historically performed weakly in the third quarter. If gains in the first half were substantial, Q3 naturally becomes a window for institutions to lock in profits, rebalance portfolios, and rotate into defensive sectors.

Second is the issue of financing costs. The banking sector's capacity to extend margin loans to retail investors is nearing its limit. While swap financing costs have retreated slightly from their peak, they remain elevated, and prime brokers are actively reducing inventory and risk exposure.