Air Pocket Stock

What Is an Air Pocket Stock?

A stock that experiences a sudden plunge in price, much like an airplane when hitting an air pocket, is described by stock traders as an air pocket stock. In the case of a stock, the fast drop is caused by unexpected bad news about the company.

Investors, like pilots, should avoid a panicky reaction. An air pocket is usually a sign of short-term turbulence, not dire straits.

Understanding an Air Pocket Stock

An air pocket stock nearly always occurs when investors sell shares after hearing unexpected bad news about the company. An air pocket stock may or may not deserve its fate, and its price can quickly reverse.

An abrupt price drop can be caused by a small number of disgruntled investors, usually at the end of a broader correction. Prospective investors shouldn’t put too much emphasis on the event while making a long-term assessment of the stock’s potential.

Unanticipated bad news that triggers panic selling can include a lower-than-expected earnings report, an analyst downgrade, a corruption scandal, a looming competitive threat, a management change, and even geopolitical unrest.

Irrational Reactions

A significant factor contributing to a stock's decline can be irrational or highly emotional trading by other traders. Panic selling may be triggered by investor anxiety, murmurs about the market, and outsized reactions to news that may realistically poses only a short-term problem.

Most major stock exchanges employ trading curbs and temporary trading halts in order to alleviate panic selling. These measures are intended to give investors a chance to digest information about an unexpected event and evaluate its real importance.

Trading curbs can also puts parameters around the downside losses an investor can incur in a single session and may help restore order to the market.

Benefits of an Air Pocket

The air pocket metaphor also can be applied to the broader stock market and any individual sector within it.

When the market is described as having hit an air pocket, it means that one or more of the major stock indexes have experienced a moderate and possibly temporary downward price movement. It is a miniature correction, and most observers will expect it to be reversed in the short term.

A Buying Opportunity

Whether the term refers to an individual stock or the broader market, an air pocket can be a buying opportunity for the savvy investor who is looking to increase their holdings at a discount price.

This is especially true when selling is caused by short-term indicators or uncertainty. The stock markets are turbulent by nature, and reactions to events can affect prices significantly from day to day. Many of those events are ephemeral.

Some professional traders make a living taking advantage of air pockets. They look out for buying (and selling) opportunities that are related to ephemeral events. They profit when the bad news evaporates.