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Dead Cat Bounce

In finance, a dead cat bounce is a small, brief recovery in the price of a declining stock. Derived from the idea that "even a dead cat will bounce if it falls from a great height", 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.

History

The earliest citation of the phrase in the news media dates to 1985 when the Singaporean and Malaysian stock marketsbounced 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.

 

Variations and usage

The standard usage of the term is: A short rise in price of a stock which already 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:

  • A stock in a severe decline has a sharp bounce off the lows.
  • A small upward price movement in a bear market after which the market continues to fall.

Technical analysis

A "dead cat bounce" price pattern may be used as a part of the technical analysis method of stock trading. Technical analysis describes a dead cat bounce as a continuation pattern that looks in the beginning like a reversal pattern. It begins with a downward move followed by a significant price retracement. The price fails to continue upward and instead falls again downwards, and surpasses the prior low.

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