What is an Air Pocket Stock
An air pocket stock is a stock that experiences a sudden drop, like an airplane might upon hitting an air pocket. Air pocket stocks are usually the result of investors reacting to negative news.
BREAKING DOWN Air Pocket Stock
An air pocket stock nearly always occurs when investors sell shares after hearing unexpected bad news about the company. An air pocket stock isn't necessarily in dire straits. More often than not, the abrupt drop caused by disgruntled investors is usually the end of the correction, and prospective investors shouldn’t extrapolate this temporary turbulence into any long-term assessment of the stock’s future potential.
The unanticipated bad news that can trigger panic selling and the occurrence of an air pocket stock can include a lower-than-expected earnings report, corruption scandals, looming competitive threats, management changes, geopolitical unrest, and more. A significant factor in panic selling can be irrational exuberance or highly emotional trading. Panic selling can be triggered by investor anxiety, murmurs about the market, and outsized reactions to news that may only realistically pose short-term affects. To subdue panic selling, most major stock exchanges utilize trading curbs and halts, giving investors the chance to digest information about why selling is occurring. Trading curbs can also puts parameters around the downside losses an investor can incur on a given day, and may help restore order to the market.
Advantages of an Air Pocket Stock
In addition to describing the movement of individual stocks, the “air pocket” metaphor is also applied to the broader stock market. When the market is described as having hit an air pocket, this usually means that it has undergone a moderate downward price movement, something like a miniature correction. The expectation is that this downward movement is temporary and is likely to be reversed in the short term. In either case, whether referring to an individual stock or the broader market, an air pocket can represent a buying opportunity for the savvy investor who is looking to increase their holdings at a discount.
This is especially true when selling is caused by short-term indicators or uncertainty. Markets can be turbulent, and reactions to events that are still in the process of unfolding can affect market outlook significantly. Some traders take the opportunity to keep an eye out for selling opportunities, spotting the possibility of making the investment more attractive at its lower price. The Exhausted Selling Model is a technique traders sometimes harness in order to identify the price trading trough for which a reversal is likely to follow.