Dead Cat Bounce

A dead cat bounce is a temporary, short-lived recovery in the price of a declining asset before the downtrend resumes. The colorful name comes from the macabre Wall Street observation that "even a dead cat will bounce if dropped from high enough." It describes a rally that appears to signal a recovery but is actually just a pause before further decline. Dead cat bounces typically occur in several scenarios. After a sharp selloff, some investors see prices as cheap and buy, creating temporary upward pressure. Short sellers may cover their positions, adding to buying demand. Technical traders might see prices reaching support levels and bet on a rebound. But if the fundamental problems causing the decline haven't been resolved, the bounce fails and prices resume their descent. Identifying dead cat bounces in real-time is extremely difficult. At the moment of a bounce, it's impossible to know whether it's the beginning of a genuine recovery or a temporary respite before further decline. Many investors have been "trapped" by buying into what they thought was a recovery, only to see prices fall further. Several characteristics may suggest a bounce is a dead cat rather than a real recovery. Low volume during the bounce indicates weak buying conviction. Failure to break through prior resistance levels suggests limited upside. Continuing negative fundamental news despite the price increase warns that the underlying problems persist. Dead cat bounces are particularly common in individual stocks facing company-specific problems and in bear markets for broader indices. In the 2008-2009 financial crisis, for example, there were multiple rallies of 10-20% that ultimately gave way to further declines before the market finally bottomed. For investors, the lesson of dead cat bounces is to be cautious about buying into sharp declines without confirming that the underlying problems have been addressed. Patience often pays - waiting for clear evidence of a trend change rather than trying to catch falling knives.