Panic Selling

What Is Panic Selling?

Panic selling is a widespread selloff of a stock, a sector, or an entire market due to fear, rumor, or overreaction rather than reasoned analysis.

Often, panic selling is due to an outside event that is interpreted as a negative signal. This fear causes some investors to overreact and sell. The selling snowballs as the price drops, causing other investors to take action to prevent greater losses. That's known as a positive feedback loop.

Stock exchanges temporarily halt trading when panic selling reaches a specified level in an attempt to break this cycle of fear and selling.

Key Takeaways

  • Panic selling is the sudden, widespread selling of one or many stocks based on fear rather than reasoned analysis.
  • Panics are often triggered by news events that shake investor confidence in a single stock or industry.
  • Most major stock exchanges use trading curbs and halts to limit panic selling.
  • Some traders try to identify the "bottom" and buy.

Understanding Panic Selling

Panic selling almost always builds until some investors start liquidating their holdings in hopes of getting out before prices decline further.

Panic selling is often triggered by an event that decreases investor confidence in a stock or sector. This may be peculiar to a particular company or sector, such as a release of disappointing numbers on sales growth, revenue levels, or earnings. The initial selling is typically triggered by decreased strength in a company's fundamentals.

The situation can be amplified when the initial losses reach price points that trigger programmed trading from stop loss orders.

A significant factor in panic selling can be earlier irrational exuberance. The exuberance can collapse abruptly at the slightest negative signal. Overreaction to news that may have only short-term affects is common.

For example, the trade tensions between the U.S. and China that started in 2019. could have deteriorated to a point that caused investors to flee markets en masse, resulting in a precipitous drop in global stock markets.

Most major stock exchanges use trading curbs and halts to limit panic selling. This allows people to cool off and digest the information. It also limits the downside losses an investor can incur in a single day and restores some degree of normalcy to the market.

Financial Market Sell-Offs

Sell-offs that fall short of a panic are a common occurrence in the financial markets. In a sell-off, a particular sector may see widespread selling due to the negative press from only a few companies. Or, the losses in value may be shrugged off as a necessary correction.

Sell-offs also occur broadly across the market when trends in various asset classes are reported. For example, higher yielding treasuries can lead to a sell-off in stocks.

Post Panic Opportunities

In some cases, panic selling and broad market sell-offs can create buying opportunities. This is especially true when selling is caused by short-term indicators or uncertainty.

The financial markets are often extremely volatile and views on unfolding events can alter the outlook drastically from day to day.

Many market traders watch for selling opportunities that may make the investment more attractive at its lower price. In technical analysis, the exhausted selling model is one technique traders can use to identify the price from which a reversal is likely.

Prices inevitably go through a number of phases as they descend from panic selling, so this model relies on following a stock’s downward trend and identifying the trough buying opportunity.

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