What Is Hammering?
Let me explain what hammering means in the stock market. It's when there's rapid and concentrated selling of stock shares right after an unexpected event that people see as hugely damaging to the company's short-term performance. You end up with a steep drop in the stock's price as a result.
Key Takeaways
Hammering is essentially a fast-paced sell-off that can hit a single stock, an entire sector, or the whole market. It usually comes after an unexpected adverse event, which we call an asteroid event. Keep in mind that some stocks and sectors are more prone to these kinds of events that lead to hammering.
How Hammering Works
To understand hammering, you need to grasp what an asteroid event is. Hammering typically happens as a response to unexpected bad news, like a terrorist attack, and it can focus on one stock, a market sector, or the entire stock market.
Understanding an Asteroid Event
Sometimes, investors might even collaborate to drive the share price lower for their own gains. You can achieve hammering through a few large sell orders or a bunch of small ones. If a single company faces an asteroid event, it can trigger this sell-off—especially if the company's success depends on a key executive's reputation or a flagship product, where bad news instantly shifts the outlook.
Certain companies and industries are especially vulnerable to asteroid events. Take a small pharmaceutical or biotech firm: a setback in clinical trials or FDA approval can flip short-term profit expectations overnight. More routine asteroid events include corporate restructurings, mergers and acquisitions, bankruptcies, spin-offs, or takeovers—if these surprise the market, the stock is likely to get hammered.
You might think to benefit from an asteroid event by seeing it as temporary mispricing and buying the dipped stock, expecting a quick rebound. But that can backfire; after such an event, analysts often revise recommendations and lower price targets, and other investors follow suit, keeping the price down longer term.
Not all asteroid events are bad for stock prices, though. A hostile takeover, for instance, usually pushes up the target company's stock price. If it fails, the price could go either way based on market sentiment.
Achieving a Hammer Candlestick Chart Pattern
Technical analysts look at stock price movements to spot patterns they can exploit, and one is the hammer candlestick pattern, which signals a potential price recovery. This might show up after a long downtrend: the stock faces heavy selling, hits a low, starts recovering, and closes near or above its prior level. In this scenario, the market is essentially hammering out a bottom.
For technical analysts, this hammer pattern means the stock should reverse and start rising in price.
Example of Hammering a Stock
Consider the case of Chipotle Mexican Grill, Inc. (CMG) shares, which got hammered after reports in October 2015 of 22 people getting ill from eating at its restaurants, linked to an E. coli strain. Chipotle responded fast by temporarily closing 43 locations in Washington and Oregon, even before tests confirmed the source.
The bad news piled on: by late January 2016, 55 people across 11 states were sickened by E. coli possibly tied to Chipotle. Shares plummeted from over $750 in October 2015 to $250 by February 2018, and the company became a punchline in comedy sketches about food poisoning.
Chipotle's Response Measures
- Conducted 2,500 microbial tests on food, surfaces, and equipment, with none showing E. coli.
- Expanded testing of products before restocking restaurants.
- Conducted deep cleaning of all restaurants.
- Worked closely with government authorities to reevaluate food safety standards.
Recovery and Outcome
The FDA praised Chipotle's aggressive actions, including the shutdowns. Still, the stock didn't return to previous levels until well into 2019, and by mid-2020, it neared $1,200 per share. You could say Chipotle achieved that hammer candlestick pattern, though the recovery took longer than some investors hoped.
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