What Is a Sell-Off?

A sell-off occurs when a large volume of securities are sold in a short period of time, causing the price of a security to fall in rapid succession. As more shares are offered than buyers are willing to accept, the decline in price may accelerate as market psychology turns pessimistic.

There are several potential triggers of a sell-off, which may include the release of disappointing earnings reports or poor guidance, fears of increased competition, or the threat of technological disruption. Broader causes, such as macroeconomic concerns or natural disasters, can also trigger sell-offs.

A sell-off may be contrasted with a market rally.

Key Takeaways

  • A sell-off refers to downward pressure on the price of a security, accompanied by increasing trading volume and falling prices.
  • Sell-offs can be triggered by any number of events and will tend to pick up momentum as investor psychology begins to shift toward fear or panic.
  • Although sell-offs may be dramatic, they are also often short-lived and may be an overreaction. Afterwards, they can stabilize or reverse relatively quickly.
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What is a Sell-Off?

How Sell-Offs Work

Sell-offs occur based on the principle of supply and demand. If a large number of investors decide to sell their holdings without any compensating increase in buyers, the price of that investment will fall.

Sell-offs are a reflection of investor psychology. For instance, if a sell-off occurs after a new earnings report, the sellers may have been overly optimistic about that security when they bought it beforehand.

For contrarian investors, sell-offs can present an opportunity to buy at low prices. If investors believe that the sell-off was unwarranted or overly extreme, they might take the opportunity to buy the security at a “bargain” price.

The following situations may trigger a sell-off:

  • After the market close, a company gives sharply lower earnings guidance for the current fiscal year. In after-hours trading, there is a steep sell-off of the shares of the company.
  • During market trading hours, a news report quickly spreads that customers of a restaurant have contracted E. coli. The stock of the restaurant chain sells off, as the market now believes that the earnings of the company will be severely impacted.
  • A higher-than-expected inflation report is released in Germany, which triggers a sell-off in German bunds.
  • China surprises the global market by providing a gross domestic product (GDP) growth rate forecast that is well below expectations. A major sell-off in many basic commodities takes place.
  • A rumor during market hours that a company is about to announce a highly dilutive acquisition prompts a sell-off. However, the company releases a statement that no such talks with the alleged target have taken place, and the stock quickly makes a u-turn and heads back up.

Example of a Sell-Off: The BP Oil Spill

A notable example of a sell-off occurred in April 2010 during the Deepwater Horizon oil spill. During that month, the Deepwater Horizon offshore oil drilling platform exploded off the coast of Louisiana, eventually discharging an estimated four million barrels of oil into the Gulf of Mexico (the estimates vary widely between three and five million barrels).

In addition to its environmental impact, this event had a severe effect on the shareholders of British Petroleum (BP), which was responsible for operating the Deepwater Horizon. In the months following the oil spill, BP’s shares lost over 50% of their value, spurred by a hundredfold increase in selling volume. Understandably, investors were fearful of potential fines and legal consequences.

In the end, the Deepwater Horizon oil spill ended up costing BP $65 billion in fines and settlements and contributed to its quarterly loss of $17 billion in July 2010.

Important

Depending on the cause of the sell-off and the fundamentals of the security in question, sell-offs can present attractive opportunities to "buy low" and "sell high."

By November 2010, however, BP’s financial performance showed signs of recovery, ending the quarter with a profit of $1.8 billion. Accordingly, the share price recovered about half of its losses by the end of the year.

For many contrarian investors, this sell-off provided an attractive buying opportunity. Those who went against the grain and purchased BP’s shares at their most depressed prices saw their shares rise by over 30% by the end of the year.