Dead Cat Bounce

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Sean Maher

A 'dead cat bounce' is a figurative term used by financial traders to describe a temporary rally after a spectacular decline in the price of an asset, before resuming its downward trajectory, with the connotation that the rise was purely technical rather than based on sound fundamentals for the asset in question. It is often expressed on trading floors as the observation that "even a dead cat will bounce if it falls from a great height".

The reasons for such a bounce can be technical, as investors may have standing orders to buy shorted stocks if they fall below a certain level or to cover certain option positions. Once those limits are reached, the buy orders are activated and the sudden rise in demand causes the price of the stock to rise as well. The bounce may also be the result of speculation. Since bounces often occur, traders buy into what they hope is the bottom of the market, expecting a bounce and thereby reaping a quick profit. Thus, the very act of anticipating a bounce can create and magnify it.

A market rise after a sharp fall can only really be seen to be a "dead cat bounce" with the benefit of hindsight, although market professionals typically treat such sudden reversals with suspicion. If the asset starts to fall again in the following days and weeks to new lows, then it can be characterized as a true dead cat bounce. If the market starts to climb again after the first short bounce, then the continued rise in price action would be considered a trend reversal and not a dead cat bounce. Since this distinction only becomes obvious in hindsight, the evaluation may vary depending upon the initial and final points of reference.