Panic Buying

Carl Capolingua - Panic Buying
Panic buying occurs when investors become blind-sided by a sudden market movement and start buying up shares hastily as price increases.

High volume panic buying occurs because people are following price, not fundamentals. And this is a grave mistake for any trader to make!

What happens

Panic buying can be signaled on a stock chart by a sudden spike in volume. The spike is decided and signifies a very sharp increase in volume.

The spike indicates that high volume buying is driven by panic because of a) the short time frame in which buying occurs and b) the lack of a solid fundamental reason for buying.

This form of buying is driven by the fear of not acquiring securities before price rises even further. The problem with this is when can you tell that the price is going to stall?

And even though a panic buyer may get “in” on a trade before price peaks, who’s to say that the investor will be smart enough to get out of the trade before the inevitable fall comes?

In fact, since the panic buyer has bought without thinking in the first place, it follows that they’ll fail to smartly get out in time, too.

Beware the trend?

We’ve all been subject to panic buying before. The term doesn’t just relate to the stock market, but in all forms of buying. If we see that an asset is gaining value, the natural instinct is to buy along with the trend.

That’s where the trader has to be careful, because we are all taught from day one that, when it comes to the stock market, we should follow the trend.

However, a trend should be established and sound if we are to rely upon it. Panic buying doesn’t really signal a trend – it’s too short-term and irrational in nature to constitute the term.

Even charts pooh-pooh the idea of panic buying as a trend, as such events appear as short (though violent) blips on the chart’s radar, so to speak.

Black Friday

One of the most famous examples of panic buying is that of “Black Friday”, also known as the Fisk-Gould Scandal. Black Friday – 24 September, 1869 – occurred when the market crashed after investors tried to corner the gold market unsuccessfully.

A group headed by James Fisk and Jay Gould capitalised on market rumours at the time that the US government would be putting a lot of money into gold. Fisk and Gould used their social connections to get close to Abel Corbin, a financier who supported the pair’s arguments against the government sale of gold. Through Corbin, the men obtained assurance that the government would tip them off when it was about to sell gold.

So Fisk and Gould began buying up massive amounts of gold, sending the price up. Soon, gold was up by around 30%; and then the government’s gold flooded the market. The premium for gold plummeted literally within minutes, as ruined investors tried to sell their holdings. (And, no, culprits Fisk and Gould weren’t financially ruined by their meddling – just everyone else.)

Don’t panic

We realise that events like Black Friday only happen rarely – this, of course, is an extreme example, and not intended to make you see a conspiracy in every instance of panic buying.

The fact is that panic buying swarms the market from time to time and that will probably never change. It’s not often that market-wide panic buying occurs, but panic buying can certainly occur on damaging enough scales, usually based on unfounded market rumours concerning different companies, stocks, commodities, etc.

Panic is driven by human nature; and as the market is driven by human nature, panic will always be part of the market. However, the smart trader will recognize market panic for what it is, and not indulge his or her own tendency to panic.

Carl Capolingua
Follow Carl on Twitter @CarlCapolingua
Head of Education
Australian Stock Report

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