Dead cat bounce

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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. This may also be known as a "sucker rally".[3]

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 Chris Sherwell and Wong Sulong of the Financial Times were quoted as saying the market rise was "what we call a dead cat bounce".[4] Both the Singaporean and Malaysian economies continued to fall[5][6] after the quote, although both economies recovered in the following years.

The phrase was used again the following year about falling oil prices. In the San Jose Mercury News, Raymond F. DeVoe Jr. proposed that "Beware the Dead Cat Bounce" be printed on bumper stickers and followed up with a graphic explanation.[7] This quote was referenced throughout the 1990s and became widely used in the 2000s.[8]

"This applies to stocks or commodities that have gone into free-fall descent and then rallied briefly. If you threw a dead cat off a 50-story building, it might bounce when it hit the sidewalk. But don't confuse that bounce with renewed life. It is still a dead cat. The spot oil price has recovered from under $10 a barrel to over $13 -- but that also should not be confused with renewed life."

— Raymond F. DeVoe Jr., San Jose Mercury News, 28 April 1986[9]

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.[10]

Variations and usage[edit]

Two examples of a dead cat bounce can be seen in the stock price of Khimprom Volgograd around the period of 2007-2008.
Dead cat bounces can also be seen in economies such as Venezuela between 1980 and 2000.

The standard usage of the term refers to a short rise in the price of a stock that 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:

  • A stock in a severe decline has a sharp bounce off the lows.[11]
  • A small upward price movement in a bear market after which the market continues to fall.[12][2]
  • During the COVID-19 pandemic, the term was used to describe the phenomenon where a person in the hospital with acute symptoms would feel better and see their oxygen levels increase for a short time before a sudden crash resulting in death.[13]

Technical analysis[edit]

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 in which a reversal of the current decline occurs followed by a significant price recovery. The price fails to continue upward and instead falls again downwards and surpasses the previous low.[14] This phenomenon can be difficult to identify at the time of occurrence, and like market peaks and troughs, it is usually only with hindsight that the pattern is able to be recognised.[15]

See also[edit]

References[edit]

  1. ^ "Definition of dead-cat bounce | Dictionary.com". www.dictionary.com. Retrieved 30 April 2022.
  2. ^ a b Chen, James. "Dead Cat Bounce". Investopedia.
  3. ^ Mitchell, Cory. "Sucker Rally Definition". Investopedia.
  4. ^ Chris Sherwell, "Singapore stock market stages modest recovery after steep fall", Financial Times, December 7, 1985, quoted in Word Spy
  5. ^ "Malaysian GDP growth timeline". Malaysian Developmentalist.
  6. ^ "Singapore GDP Per Capita". MultPL. Retrieved 2 February 2018.
  7. ^ "Raymond DeVoe Jr, longtime financial writer who coined phrase 'dead cat bounce,' dies at 85". Bangor Daily News. 30 September 2014. Retrieved 30 April 2022.
  8. ^ "etymology - From the "Baghdad bounce" to the "dead-cat bounce"". English Language & Usage Stack Exchange.
  9. ^ "Low oil prices likely to limit energy stocks". San Jose Mercury News. Associated Press. 28 April 1986. Retrieved 30 April 2022.(subscription required)
  10. ^ "Speaking Politics phrase of the week: 'dead-cat bounce'". Christian Science Monitor. 31 October 2016.
  11. ^ "* Dead Cat Bounce (Stock market) - Definition,meaning - Online Encyclopedia". en.mimi.hu.
  12. ^ Martin, Gary. "'Dead cat bounce' - the meaning and origin of this phrase". Phrasefinder.
  13. ^ "Dead cat bounce".
  14. ^ "Traders Log web site". Archived from the original on 2013-12-14. Retrieved 2009-10-14.
  15. ^ "Dead Cat Bounce". Investopedia.