dead-cat bounce

noun
Updated on: 13 Oct 2017

Definition of dead-cat bounce

:a brief and insignificant recovery (as of stock prices) after a steep decline

Origin and Etymology of dead-cat bounce

from the facetious notion that even a dead cat would bounce slightly if dropped from a sufficient height


Financial Definition of DEAD-CAT BOUNCE

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

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.


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