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Dead Cat Bounce

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A Dead Cat Bounce is a term used in market economics to describe a pattern wherein a moderate rise in the price of a stock follows a spectacular fall, with the connotation that the rise does not indicate improving circumstances. It is derived from the notion that "even a dead cat will bounce if it falls from a great height".

The phrase has been used on the trading floors for many years. However the earliest recorded 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. The Financial Times reported a stock broker as saying the market rise was a 'dead cat bounce'.

The reasons for such a bounce can be technical - investors may have standing orders to buy shorted stocks if they fall below a certain level, to cover certain option positions, or for speculation. Since bounces often occur, investors buy into what they hope is the bottom of the market, expecting a bounce and thus make a quick profit. The very act of anticipating a bounce can create and magnify it.

A market rise after a sharp fall can only really be seen to be a "dead cat bounce" with the benefit of hindsight. If the stocks starts to fall again in the following days and weeks, then the bounce was for technical or speculative reasons. If the stock remains steady, then the bounce is merely a correction to over-selling.

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