Dead cat bounce
In economics, 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", 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 term "dead cat bounce" is derived from the idea that "even a dead cat will bounce if it falls from a great height."[2] The phrase has been used on Wall Street for many years. The earliest use of the phrase dates from 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 the Financial Times were reported as saying the market rise was a "dead cat bounce."[3] A similar expression in Cantonese has an older history and this may be the origin of the term.
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.[4]
- A small upward price movement in a bear market after which the market continues to fall.[5][6][7]
Technical analysis
A "dead cat bounce" price pattern may be considered part of the technical analysis method of stock trading. Price patterns such as the dead cat bounce are recognized only with hindsight. 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 exceeds the prior low.[8]
See also
References
- ^ Business Dictionary web site
- ^ Investopedia
- ^ Chris Sherwell, "Singapore stock market stages modest recovery after steep fall," Financial Times, December 7, 1985, quoted in Word Spy
- ^ My Stock Market Power
- ^ Traders101 web site
- ^ The Phrase Finder
- ^ Investopedia web site
- ^ Traders Log web site