26 May 2018

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.

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.

Covid-19 – Johns Hopkins University

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