Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Dead Cat Bounce

What it is:

A dead cat bounce refers to a temporary recovery in a stock price or a temporary market rally after a significant downward trend.

How it works (Example):

For example, let's assume the market has been falling over the last ten weeks but there is a broad market rally in week 11. The rally is considered a dead cat bounce if it's short-lived and the market continues to fall again in week 12.

Most of the time, waffling causes a dead cat bounce. During a long downward slide, some investors may think that the market or a particular security has bottomed out. They begin buying instead of selling, or some may be closing out their short positions and pocketing gains. These factors create a little buying momentum, albeit brief.

Why it Matters:

A dead cat bounce is by definition a temporary change, but it can be very difficult (if not impossible) to reliably determine at the time if the rally is actually the beginning of a sustained reversal.

Short-term investors often enjoy a dead cat bounce because there is opportunity in the short term change in direction.