What Is a Dead Cat Bounce?

A dead cat bounce is a particularly colorful way of describing a sudden, seemingly inexplicable swing in momentum within a specific asset or market. One recent example took place during the 2008 financial crisis (and subsequent stock market crash). For months, investors sat on pins and needles, eager for the market to recoverand experienced a glimmer of hope when the Dow Jones saw an upswing in prices mid-year. Some investors trusted this was the market recovering and jumped on the opportunity to buy shares. Unfortunately, it was only a dead cat bounce created by the false demand of the assets.

To illustrate a dead cat bounce, lets suppose company ABC trades for $70 on June 5th, then drops in value to $50 per share over the next four months. Because a dead cat bounce is often an illusion of actual intrinsic value, investors may be tempted to jump on an investment opportunity before it makes sense to do so.

The following typical sequence of events may help an investor correctly identify a dead cat bounce. Unfortunately, these characteristics make it easy to mistake a dead cat drop for an investment opportunity. The truth is, there is no exact way to differentiate a dead cat bounce from a full market recovery.

If theres no market indicator as to why the stock is rebounding , it might make sense to suspect a dead cat bounce. Active investors could also consider selecting stocks across varying sectors to give their portfolio even more diversification instead of narrowing their niche. For investors who want to take an active role in investingregardless of potential dead cat bouncesan online trading platform like SoFi Invest offers the opportunity to manage your money the way you want.

You can rebalance your portfolio quarterly to ensure it continues to align with your financial goals and risk profile. 3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

Why do they call it a dead cat bounce?

A dead cat bounce is a temporary, short-lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. … The name “dead cat bounce” is based on the notion that even a dead cat will bounce if it falls far enough and fast enough.

How can you tell if a dead cat is bouncing?

A dead cat bounce is a sharp decline in a stock’s price, followed by a failed rally and further decline..The dead cat bounce trader watches the price fall; when it starts to bounce, they get ready to go short.

How long is a dead cat bounce?

2. Length of dead cat bounces. Dead cat bounces can vary greatly in length of time. An occurrence of a dead cat bounce (i.e., a sudden and false increase in stock prices) can go anywhere from a few days to several months.

What is a dead cat bounce in the market?

A dead cat bounce is an investing term for the temporary rise in the price of a stock or other asset during a long period of decline. The morbid term comes from the idea that if it falls far enough, even a dead cat will bounce.

A dead cat bounce is a temporary, short-lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. Frequently, downtrends are interrupted by brief periods of recoveryor small ralliesduring which prices temporarily rise.

A dead cat bounce is a short-lived and often sharp rally that occurs within a secular downtrend, or one that is unsupported by fundamentals that is reversed by price movement to the downside. Similar to identifying a market peak or trough, recognizing a dead cat bounce ahead of time is fraught with difficulty, even for skilled investors.

In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock.[1] Derived from the idea that “even a dead cat will bounce if it falls from a great height”,[2] the phrase, which originated on Wall Street, is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline.

The earliest citation of the phrase in the news media dates to December 1985 when the Singaporean and Malaysianstock markets bounced back after a hard fall during the recession of that year. Journalists Horace Brag and Wong Sulong of the Financial Times were quoted as saying the market rise was “what we call a dead cat bounce“.

The phrase is also used in political circles for a candidate or policy that shows a small positive bounce in approval after a hard and fast decline. The standard usage of the term refers to a short rise in the price of a stock which has suffered a fall.

A dead cat bounce is an investing term for the temporary rise in the price of a stock or other asset during a long period of decline. The morbid term comes from the idea that if it falls far enough, even a dead cat will bounce.

The goal of trying to identify a dead cat bounce is to determine whether a stock or other asset that gains value after a prolonged decline is going to keep increasing in price. When the COVID-19 pandemic hit, fears of loan defaults and plunging consumer interest rates caused the bank stock to lose significant value.

What is a Dead Cat Bounce?

When a single security or entire market temporarily recovers after a slow and steady decline—and then continues its drop—it’s known as a dead cat bounce. This rebound doesn’t have a rhyme or reason to the recovery; it’s merely part of a short-term market variation.In actuality, the rebound creates false value, and investors shouldn’t assume that the asset has actually gained any real value. The term “dead cat bounceis market jargon that comes from the idea that if you drop a cat from a high enough platform and it falls fast enough, it will bounce.For this term to apply, the security price must steadily decline in value and then have a short recovery surge. The term won’t apply to a security that’s continuing to grow in value. The revival must be brief, before the price continues to drop again.A dead cat bounce is not used to describe the ups and downs of a typical trading day—it refers to a longer-term drop, rebound, and continued drop. It’s also important to point out that this financial phenomenon can pertain to individual securities such as stocks or bonds, to stock trading as a whole, or to a market.

Example of a Dead Cat Bounce

To illustrate a dead cat bounce, let’s suppose company ABC trades for $70 on June 5th, then drops in value to $50 per share over the next four months. Between Oct 7th and Oct 14th, the price rises to $65 per share—but then starts to rapidly decline again on Oct 15th. Finally, ABC’s stock price settles at $30 per share.This pattern is how a dead cat bounce would look in a real-life trading situation. The security quickly paused the decline for a swift revival, but the price recovery was temporary before it started falling again and eventually steadied at a lower price.

How to Spot A Dead Cat Bounce

Because a dead cat bounce is often an illusion of actual intrinsic value, investors may be tempted to jump on an investment opportunity before it makes sense to do so.The following typical sequence of events may help an investor correctly identify a dead cat bounce.1. A security’s price steadily declines.Unfortunately, these characteristics make it easy to mistake a dead cat drop for an investment opportunity. The truth is, there is no exact way to differentiate a dead cat bounce from a full market recovery. It’s generally easier to identify this pattern after the fact, instead of when it’s happening in real-time.

Dead Cat Bounce or Rally?

One way to stay alert for a dead cat bounce with a particular stock is to consider whether the now-rising stock is still as weak as it was when its price was falling. If there’s no market indicator as to why the stock is rebounding, it might make sense to suspect a dead cat bounce.

Dead Cat Bounce or Lowest Price?

Since investors are looking for opportunities to profit, they try to find investment opportunities that allow them to “buy low and sell high.” By using such strategies, they can profit from their investment endeavors. Therefore, when assessing investment opportunities, a successful investor will have to recognize emerging companies and buy shares of their stock before other investors get wind of the lucrative company.Since companies go through business cycles where stock prices may fluctuate, pinpointing the lowest price point might be hard to decipher. There’s no way to know if a dead cat bounce is happening, until the prices have resumed their descent.

History[edit]

The earliest citation of the phrase in the news media dates to December 1985 when the Singaporean and Malaysian stock markets bounced back after a hard fall during the recession of that year. Journalists Horace Brag and Wong Sulong of theThe phrase is also used in political circles for a candidate or policy that shows a small positive bounce in approval after a hard and fast decline.

Technical analysis[edit]

The standard usage of the term refers to a short rise in the price of a stock which has suffered a fall. In other instances the term is used exclusively to refer to securities or stocks that are considered to be of low value. First, the securities have poor past performance. Second, the decline is “correct” in that the underlying business is weak (e.g. declining sales or shaky financials). Along with this, it is doubtful that the security will recover with better conditions (overall market or economy).Some variations on the definition of the term include:

What does a dead cat bounce indicate?

The goal of trying to identify a dead cat bounce is to determine whether a stock or other asset that gains value after a prolonged decline is going to keep increasing in price. If a trader has sold a particular stock short and views a price increase as a dead cat bounce, they may decide to maintain the short position. Conversely, if a trader views a price movement as a sustainable rally, then the trader should close the short position.To be clear, a dead cat bounce is a term used in technical stock analysis, of which we’re typically not fans. Understanding the fundamentals of a business, not reading stock charts, is generally a better way to produce market-beating returns over time.But it’s still important to know some of the key concepts technical analysts use. It can be helpful to consider whether a stock with a beaten-down price is rallying because the company’s business is improving or if the stock is attracting attention simply because it

Example of a dead cat bounce

Consider the stock of the major financial institutionWithin a few weeks of that low point, however, Wells Fargo’s stock price had climbed to $33.91. But, by mid-May, it had fallen even further to about $22.50. The temporary price increase was probably triggered by the federal government’s first economic stimulus. At the time, significant uncertainty remained regarding the future of the banking industry.Investor confidence remained low, making the price rally nothing more than a dead cat bounce. It’s worth noting that Wells Fargo stock eventually did recover but only months after that initial bounce.