Dead cat bounce
Encyclopedia
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, a dead cat bounce is a small, brief recovery in the price of a declining stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

. 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
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...

, is also popularly used 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." The phrase has been used on Wall Street for many years. The earliest use of the phrase dates from 1985 when the Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...

an and Malaysian stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

s bounced back after a hard fall during the recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

 of that year. Journalists Christopher Sherwell and Wong Sulong of the Financial Times
Financial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....

reported a stockbroker as saying the market rise was a "dead cat bounce." A similar expression has an older history in Cantonese and this may be the origin of the term.

Variations and usage

A short rise in price of a stock which already suffered a fall is the standard usage of the term. 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.
  • A small upward price movement in a bear market after which the market continues to fall.

Technical analysis

A "dead cat bounce" price pattern may be considered part of the technical analysis
Technical analysis
In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis incorporate technical analysis, which being an aspect of active management stands...

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.

Alternate meanings

The term has also been used in reference to political polling numbers and car sales: "Saab has survived a near-death experience and is back selling cars, although the jury is still out on whether it's a dead-cat bounce."
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