Loading the player...

What is a 'Sell-Off'

A sell-off is the rapid selling of securities such as stocks, bonds, ETFs, commodities or currencies. A sell-off may occur for many reasons, such as the sell-off of a company's stock after a disappointing earnings report, the departure of a important executive or the failure of an important product. Markets and stock indexes can also sell-off when interest rates rise or oil prices surge, causing increased fear about the energy costs that companies will face. Sell-offs can also be caused by political events, or terrorist acts. 

BREAKING DOWN 'Sell-Off'

All financial trading instruments have sell-offs. They are a natural occurrence from profit-taking, short-selling or portfolio turnover. Healthy price uptrends require periodic sell-offs to replenish supply and trigger demand. Minor sell-offs are considered pullbacks. Pullbacks tend to hold support at the 50-period moving average. However, when a sell-off continues on an extensive basis, it can be signs of a potentially dangerous market reversal leading to a correction or a crash.

Corrections tend to be more aggressive, usually testing the 200-period moving average. A correction is generally a 10% or greater decline in a company's stock or a market index from its recent highs. The death cross is a popular sell-off signal in which the daily 50-period moving average forms a crossover down through the daily 200-period moving average. However, the distinction between a correction and a bear market is clearly defined.

Corrections and Bear Market Sell-offs

When a sell-off resonates throughout the financial markets for an extended period of time, it can trigger a bear market. A bear market is generally considered to be a decline of 20% or more from a security or markets recent most recent closing high. Since 1929, the domestic equity markets have experienced 20 bear markets, according to Yardeni Research. The average bear market experiences a 35% sell-off from the highs and lasts an average of 16 months. Bear markets are defined by two distinguishing characteristics. The sell-off must remain at least 20% from the highs for a duration of at least two months. Anything less is considered a correction. At the beginning or 2016, the markets were dangerously close to a bear market, as the Standard and Poor's 500 (S&P 500) index fell negative 18% in the first two months of the year. However, the rebound back to break-even price levels distinguished it as a correction, as it failed to hold negative 20% losses for more than two months.

[If you are interested in learning how to protect your portfolio during sell-offs, check out our Investing for Beginners course on the Investopedia Academy]

There have been two bear market sell-offs in the new millennium. The S&P 500 fell 58% during the bear market of 2000 to 2002 during the technology bubble. The second bear market sell-off occurred during the housing bubble and global financial meltdown from 2007 to 2009 as the S&P 500 dropped 57%. The average bear market occurs every 3.4 years. Markets have been in a bull market for nearly double the average figure.

RELATED TERMS
  1. Bear Market

    A bear market is a market in which securities prices fall and ...
  2. Bear Position

    Alternate term for a short position in a financial security. ...
  3. Panic Selling

    Panic selling refers to wide-scale selling of an investment, ...
  4. Bear Tack

    A decline in the price of a stock, sector or market that may ...
  5. Bear Trap

    A false signal that the rising trend of a stock or index has ...
  6. Bear

    An bear is an investor who believes that a particular security ...
Related Articles
  1. Investing

    How To Spot A Sell-Off

    The ability to identify a sell-off can be an extremely reliable resource to have in a time of market uncertainty.
  2. Investing

    Why the Bull Market Is Alive and Well

    Stocks rebounded sharply after their recent correction, a sign to some that the bull market remains strong.
  3. Insights

    Digging Deeper Into Bull And Bear Markets

    Discover why it's important to know the characteristics of bull and bear markets, the two types of market conditions.
  4. Investing

    A Stock Sell-Off Vocabulary Guide

    When stocks sell-off, a whole bunch of new financial terms start popping up that you may not be familiar with. Here's our cheat sheet to help you out.
  5. Trading

    Profiting in bear and bull markets

    There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage.
  6. Investing

    Vanguard Chief Economist: Investors Should Have Seen Sell-Off Coming

    Vanguard's chief economist said that investors shouldn't be surprised by the sell-off in the stock market.
  7. Investing

    Training your Mind in Volatile Markets

    Volatility is a tricky animal, and it behaves differently when markets are under pressure. That's happening now. 
  8. Retirement

    Timing Markets With 401(k) Stocks? Bad Idea

    This week's sell-off has prompted investors to start selling stocks in their 401(k)'s as they try to time the market. That's never a good idea.
  9. Investing

    Why Severe 19% Correction Could Happen Like 1998

    This year has much in common with 1998, when techs led the market down by 19% in a few weeks.
RELATED FAQS
  1. How do you use put options to profit from a bear market?

    Learn how traders use put options in their trading strategies to remain profitable, even in a bear market. Everyday investors ... Read Answer >>
  2. How can traders profit from a death cross pattern?

    Seek long-term profits by using the death cross pattern to identify either a trading entry point or a major resistance level ... Read Answer >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center