Dead Cat Bounce

Dead Cat BounceDead cat bounce is a Wall Street term that refers to a small, brief recovery in the price of a declining stock. The phrase can be used to refer to any finance system instrument (that is not a Derivative) having a recovery in value like Bonds, Mutual Funds, etc. Occasionally, the phase has been used in Foreign Exchange contexts to refer to a currency having a temporary recovery in value.

 

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 Singaporean and Malaysian stock markets bounced back after a hard fall during the recession of that year. Journalists  Christopher Sherwell and Wong Sulong of the Financial Times 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.
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