What Is Hammering?

Hammering is rapid and concentrated selling of stock shares in the wake of an unexpected event that is perceived as extremely damaging to the company's short-term performance. The effect of hammering is a steep drop in the price of the stock.

Key Takeaways

  • Hammering is a fast-paced sell-off in a stock, a sector, or the markets as a whole.
  • It typically follows an unexpected adverse event.
  • Some stocks and sectors are particularly prone to events that cause hammering.

How Hammering Works

Hammering is usually a response to unexpected bad news, also known as an asteroid event, such as a terrorist attack. It may focus on a single stock, a sector of the market, or the entire stock market.

In some cases, investors may collaborate in an effort to push the share price lower for their own purposes. Hammering can be accomplished with a few large sale orders or many small sell orders.

A single company may experience an asteroid event that triggers hammering. If the success of a company relies on the reputation of a particular boss or the success of a single product, an adverse event may instantly change the company's outlook.

Some companies and industries are particularly prone to asteroid events. For a small pharmaceutical or biotechnology company, a setback in a clinical trial or FDA approval can change expectations of its short-term profit expectations overnight.

More common asteroid events include corporate restructurings, mergers and acquisitions deals, bankruptcy, spin-offs, or takeovers. If such an event catches the market by surprise, the stock could well get hammered.

Investors may try to benefit from an asteroid event if they perceive it as a temporary stock mispricing. They simply buy the stock after it falls in the expectation that it will quickly recover.

To technical analysts, a hammer candlestick pattern indicates that a stock should reverse course and begin to rise in price.

That strategy may misfire. After an asteroid event, stock analysts review the stock and may issue revised recommendations and lower price targets. Other investors will respond to those recommendations, keeping the stock's price lower for the long haul.

Some asteroid events actually are good for a stock's price. When a hostile takeover occurs, the stock price of the target company is likely to rise. If the takeover fails, the stock price could rise or fall depending on market sentiment.

The Hammer Candlestick Chart Pattern

Technical analysts, who watch the ups and downs of stock prices in order to identify patterns that can be exploited, have identified a hammer candlestick pattern that indicates a recovery in a stock's price.

This indicator may appear after a prolonged downtrend in the stock's price. The stock endures strong selling. It reaches a low point and then begins to recover. Eventually, it closes near its previous mark or higher.

In this case, the market may be seen as "hammering out a bottom."

Example of Hammering a Stock

Shares of Chipotle Mexican Grill, Inc. (CMG) got hammered after 22 people reported becoming ill after eating at its restaurants in October 2015. From October 2015 to February 2018, shares went from above $750 per share all the way down to $250.

Chipotle did not return to its previous levels until well into 2019. By mid-2020, its price had topped $1,200 a share. It's safe to say that Chipotle achieved that hammer candlestick pattern.