South Korea’s stock market, which experienced a more than 100% surge in the first half of 2026, suffered a historic collapse in July. The KOSPI index plummeted over 33% for the month, eclipsing the 27% drop during the 1997 Asian Financial Crisis and the 23% decline during the 2008 Global Financial Crisis to become the worst monthly performance in the nation’s history. As consecutive circuit breakers and a wave of retail investor margin calls fueled extreme panic, several foreign brokerages now suggest that the structural, forced liquidation driving the sell-off is largely exhausted and the market is approaching a near-term bottom.
In the first half of 2026, fueled by the artificial intelligence and memory chip boom, shares of Samsung Electronics and SK Hynix skyrocketed. The KOSPI index surged as much as 116%, hitting an all-time high of 9,385.59 on June 19 and briefly making it the world’s sixth-largest stock market. However, this leveraged-fueled rally reversed violently in July.
Leveraged Funds Amplify Gains and Losses, Monthly Market Value Evaporates
Market data indicates that the key driver of the rally was a massive influx of retail money into leveraged products. By early July, outstanding margin loans in the Korean stock market had soared to a record high of ₩29.2 trillion (approximately $20.5 billion), with a significant portion concentrated in leveraged ETFs tied to individual stocks like Samsung Electronics and SK Hynix.
The tide turned sharply as the global AI stock rally cooled and the Bank of Korea raised interest rates for the first time since 2023. The KOSPI officially entered a technical bear market in mid-July before being hit by further devastating blows. On July 28, news broke that China had begun mass-producing self-developed deep ultraviolet (DUV) lithography machines, dealing a heavy blow to the outlook for South Korea’s semiconductor industry. The following day, SK Hynix reported record-breaking earnings that nonetheless fell short of market expectations, triggering a fresh wave of panic selling.
A vicious cycle quickly took hold. Falling share prices triggered margin calls, forcing investors to sell assets to raise cash. These forced liquidations further depressed prices, while leveraged ETFs mechanically sold off holdings as per their mandates, accelerating the decline and spreading panic. On July 28 and 29, the Korean stock market triggered circuit breakers on two consecutive trading days for the first time in its history, wiping out approximately ₩864.5 trillion (roughly $607.5 billion) in market value in just two sessions.
Among individual stocks, SK Hynix suffered a record single-day percentage drop after its earnings release, with shares plunging 46.69% over the past month. Samsung Electronics fell 35.45% over the same period. Leveraged ETFs linked to these stocks were hit even harder, with a 2x leveraged ETF tied to SK Hynix collapsing more than 80%.
Amid the extreme pessimism, a new research report from a major U.S. brokerage argues that the deleveraging process in the Korean stock market is largely complete and the forces that drove the mechanical sell-off are rapidly fading. The broker points to four key indicators suggesting the market is approaching a near-term bottom.
First is the progress of leveraged ETF unwinding. The report states that the unwinding of leveraged ETFs has reached 100%, with their total size shrinking dramatically from a peak of $50 billion at the end of June to $17 billion. Capital inflows have completely stalled, and the mechanical selling pressure from daily rebalancing mechanisms has significantly diminished.
Second is the degree of hedge fund deleveraging. The long-short leverage ratio tracked by the brokerage has plunged from a peak of 5.7x to 3.2x, nearing normal levels, with the deleveraging process roughly 90% complete.
Third is the change in retail margin loan balances. Margin debt has moderately declined from its historical peak to roughly $20 billion, without any abnormal spikes. Retail investors still hold ample cash, overseas assets, and existing profits as a buffer, significantly reducing the probability of another disorderly forced-liquidation stampede or circuit breaker event.
Fourth is a notable reduction in foreign selling pressure. Of the more than $110 billion in prior foreign outflows, 90% was concentrated in the two memory chip giants, Samsung Electronics and SK Hynix. With their respective weights in the MSCI Emerging Markets Index declining from 9.5% to 6.5% and from 8.3% to 4.5%, the passive selling pressure from index-tracking funds has eased considerably.
Another market analysis echoes this view, noting that the primary culprit behind the crisis—single-stock leveraged ETFs—has shrunk by 64%, from a peak of ₩76.4 trillion (approximately $53.7 billion) at the end of June to ₩27.6 trillion (approximately $19.4 billion) recently. Hedge fund leverage has fallen from 5.7x to 3.2x, and retail margin loan balances have retreated from ₩38.6 trillion (approximately $27.1 billion) to ₩32.67 trillion (approximately $23.0 billion). With a large number of highly leveraged investors forced out of the market, the probability of further concentrated forced liquidations is decreasing, and the Korean stock market is moving closer to a liquidity-driven bottom.
Technical Outlook: Will Key Support Hold?
From a technical perspective, the KOSPI opened July at 8,591.50, reached a high of 8,620.15, and plunged to a low of 5,262.77, marking a peak-to-trough swing of 38.95% within the month. From its all-time high of 9,385.59 set in June, the maximum drawdown approached 44%, far exceeding the 31.1% decline during the COVID-19 crash in March 2020.
Buying pressure has so far defended the critical support zone between 5,100 and 5,300 points, with a modest intraday rebound seen on Thursday. However, market participants warn that a break below the 5,100 support level could trigger a further slide, with the next major support zone located between 3,200 and 3,400 points—implying a potential further decline of roughly 40% from current levels.
In response to this historic crash, South Korea’s financial authorities have convened emergency meetings. The nation’s finance minister stated that the government will review the screening system for highly leveraged products to prevent similar systemic risks from recurring. As structural selling pressure gradually subsides, the resonance effect of global tech stocks deleveraging alongside Korean equities is also expected to ease, though the restoration of market confidence and credit conditions will require a longer period of stabilization.