Sell-off

Publication Date :

18 Jun, 2024

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Table Of Contents

Sell-off Meaning

Sell-off is the expeditious selling of assets, such as stocks, bonds, or commodities, leading to a sharp or sudden decline in prices. The various reasons behind it include weak economic position, negative news about a company or the economy, geopolitical events, government policy changes, or investor sentiment shifts.

Such a bearish trend can be witnessed when the investor confidence in a company or the asset falls due to a particular event, rumor, or news that indicates a possible future decline in the security price. It is often unpredictable by the market analysts. Although the price fall is significant, for a short span, after that, the market recovers and attains stability.

Sell-off Meaning

Sell-off is the massive selling of assets like stocks, bonds, derivatives and commodities in the open market, assuming the potential price fall or loss by the investors.
Such a bearish trend is observed due to negative market sentiments arising from negative news, events, or announcements about the asset, company, or economy, changes in economic or monetary policies, and macroeconomic concerns.
It often leads to a sudden price fall in security. However, the market improves or stabilizes quickly.
Investors should hold or buy assets in a bearish market to book profits for the future.

Sell-off Explained

Sell-offs indicate the aggressive bear market trend where the number of sellers is significant compared to the number of buyers for a particular asset. The financial markets function according to the demand and supply of securities. Thus, when investors presume a further decrease in an asset's price in the open market due to negative information about the company, asset, or economy, they start panicking and selling the respective security immediately in sizable numbers. Such overselling floods the financial market with particular security while its demand remains low; hence, the security price drops considerably.

Some of the prominent causes of asset sell-offs are as follows:

The company reports low earnings in a certain accounting period,
The government unfavorably changes the economic policies,
Adverse economic conditions
Negative news about the asset or the company
Technological threat
Natural disasters, pandemics, or macroeconomic issues
Entry of a strong competitor
Political unrest or war

Thus, investors' negative market sentiments and fear often create such market downtrends. As the sell-offs are usually difficult to anticipate, the investors, especially the intraday traders, incur heavy losses in such conditions. However, it poses an opportunity for long-term or contrarian investors who buy stocks at a low price and wait for the market to become stable.

Examples

Check out these examples for a better idea:

Example #1

Suppose the stocks of an automobile company witness a sell-off after the government increased taxes on diesel cars. The stocks were previously trading at $87. After the news, the investors assumed a significant decline in the demand for diesel cars and, therefore, started selling their shares out of panic and uncertainty. Thus, the stock price came down to $71 in a week.

Example #2

Roku Inc., a leading company in the platform and player segment, had witnessed a sharp increase in its earnings and share prices during the COVID-19 pandemic when everyone was sitting at home and watching television (as there was not much to do for entertainment). Roku's stock price went up to 148% in 2020. However, after Roku released its fourth-quarter earnings on February 18, 2023, its stocks witnessed a massive global sell-off at $76.75, dropping since then.

Although as of March 18, 2023, the Roku price is high by 7.08%, backing support at $50. The price fall can be seen as the stock stocks between the 50-day EMA and 200-day EMA. The company lost the gains after the financial report for 2022 quarter four was released.

Sell-off vs Spin-off

When a company plans for divestiture, it spins off, while investors often sell off the securities they hold. The two contrast from each other in the following ways:

Basis	Sell-off	Spin-off
Meaning	It is a way of divesting from a particular security by selling the stocks in the open market.	It is a means of divestiture where an existing company forms a new and independent entity or divides the parent company by distributing or selling new shares of the existing business.
Purpose	Avoid loss from holding risky assets	Determined internally through net asset valuation
Occurs	In the open market, out of investors’ fear or panic	Within the corporate hierarchy
Stock Valuation	Determined internally through net asset valuation	Determined internally by through net asset valuation
Triggered by	In the open market, out of investors’ fear or panic	Better manage and control a promising division or handle the resources efficiently
Existence	Short-term	Long-term
Decision	Unplanned and immediate	Strategic and planned

Sell-off vs Rally

The sell-off and rally are the two sides of a stock price movement. Although both are for short-term, let us discuss the various distinctions between them:

Basis	Sell-off	Rally
Meaning	Aggressive and significant selling of assets by the investors resulting in price fall	Sharp rise in the asset prices in the short term
Price Movement	Downward or Bearish	Upward or bullish
Reasons or Causes	Increase in asset demand due to huge investment capital in the financial market, positive economic policies, news, or events.	Increase in asset demand due to huge investment capital in the financial market, positive economic policies, news or events.
Predictability	Sell-offs are often unpredictable	Rallies can be gauged through trend indicators and other technical indicators

Frequently Asked Questions (FAQ)

What is behind the global stock market sell-off?

The global stock market sell-off is triggered by the decreasing yield of Treasury bonds and the banks' prevailing negative interest rates in some European and Japanese cities. Moreover, the fall in energy and commodity prices can be blamed on the increasing global oil glut due to the excessive oil output or supply by the US and Saudi Arabia. Also, the consistent sliding down of the S&P 500 is a sign of a global sell-off.

What to do during a sell-off?

As sell-offs are temporary, the shareholders should hold the asset until the market recovers or stabilizes to avoid loss. Moreover, a strategic investor must buy such a security since it is available at best or at a bargain price during the sell-off period.

How long do stock sell-offs last?

Stock sell-offs don't sustain for long as these are temporary bearish trends observed for approximately 342 days on average. However, it results in a bullish price movement for a considerable period.