Dead Cat Bounce

Definition

The term dead cat bounce refers to a temporary increase in a financial market, or individual security, after a sustained decline.  Oftentimes, the phrase dead cat bounce refers to the temporary recovery of a security deemed to be of low quality.

Explanation

Financial markets, such as commodities, bonds, and stocks, typically demonstrate an upward or downward trend over time.  Secular trends can last as long as 25 years, while primary trends will last for twelve months or more.  A dead cat bounce is a secondary trend, which can last from as few as a couple of weeks to several months, and represents the temporary reversal of a bear market or the downward price movement of a security.

A dead cat bounce can only be recognized after the fact.  In other words, the upward movement in value must be temporary and the value of the security must ultimately fall below its previous low.  A dead cat bounce can occur when investors are closing out a short position in the security, or if enough investors believe the price of a stock has bottomed out.

Related Terms

bull market, bear market, market correction, market trend, market sentiment