What Is Price Creep?
Price creep describes the gradual and steady increase in the valuation or market price of an asset. Price creep refers to a situation in which either an individual or a group of individuals gradually lessen its reservations about paying higher prices for a given asset.
- Price creep is when prices steadily rise, often because participants become used to the higher prices and are therefore willing to pay higher prices.
- In the financial markets, price creep can lead to steadily rising prices for periods of time. It can also lead to a big price drop when investors start to sell, creating a domino effect of sell orders hitting the market.
- Price creep can lead investors to rethink their valuations of a stock or other asset. Sometimes this may lead to profitable outcomes, but it can also lead to paying too much.
Understanding Price Creep
Everyday life provides commonplace examples of price creep in action. Rates charged at movie theaters or for dinner at a restaurant can be subject to price creep, especially in high-profile urban areas. Over time, customers become accustomed to paying higher prices for the good or service in question. As a result, prices at most business tend to keep rising year after year, in excess of the rate of inflation.
Price Creep in the Financial Markets
In the financial markets, price creep can be seen where investors gradually give greater valuation to a financial security. For example, at first, an investor may deem a given stock to be worth $10 per share. But after following the company for a while and watching the stock's price trend upward, the investor may eventually relent and decide that $15 per share is a fair price for the stock, even though that person initially deemed $10 to be a fair market value.
Financial markets act as a feedback look for participants. A person may think $10 is way too high of a price, but as others buy, pushing the price up to $11, then $12, the feedback the market is giving this person may cause them to rethink their original assessment.
Price creep can drive prices to extremes. While price tops in an asset are often associated with large price moves and high volume, they don't have to be. Price can steadily climb or creep higher, and then collapse as all those who bought during the steady rise rush for the exits at once.
Indexes, and the stocks they are composed of, can experience price creep, as can any other asset.
Price creep can itself sometimes be a warning signal to a technical trader. If a price is strongly rising, and then that momentum slows and the price starts creeping marginally higher over several price swings, that could indicate that the buyers are no longer as convinced or as strong as they once were.
Real-World Example of Price Creep in a Stock Index
The S&P 500 index was moving higher into 2015. During 2015 the index still moved up, but could barely move to new highs before pulling back. The index formed a series of incrementally higher highs. This was in stark contrast to the prior price action which had seen the price move aggressively upwards. The price creep caused the index to wedge upwards, but at a flatter angle than the prior rise.
In this case, the price creep indicated waning buying pressure. Ultimately the price moved lower.
Price creep can last for a long time, so it isn't always a sign of trouble. Although, prices creeping up at a stronger angle is typically more bullish than price creeping up just barely. The former shows stronger buying pressure than the latter.
Price creep also isn't always present before a major collapse. The chart shows that in August and September, of 2014, the price moved up aggressively, and then was followed by an even more aggressive decline.