The Cockroach Theory !!

"Cockroach Theory" --You hear about cockroaches, you see them, but do you really know the theory related to them?

The 'Cockroach Theory' is a market theory that means that "Bad news tends to be released in bunches" in the same way as seeing one cockroach is usually evidence that there are many more lurking unseen.For example, Bad news from one company in a sector may indicate worsening conditions in the sector, which will therefore mean more bad news can be expected from other companies in the sector. In other words, the fact that one comapny (one cockroach) faced financial problems indicated that many other similar businesses were likely to face the same issues.

Similarly, in the credit market, “once a few problems emerge, investors assume there are many more to come,” the FTN analysts write. “Investors have to be sensitive to credit because nothing else will destroy earnings and capital given leverage inherent in bank balance sheets….”

The name "cockroach" is used for this theory because cockroaches travel in large groups and usually are not looked upon kindly.