What is a Dead Cat Bounce?

Have you heard the term “Dead Cat Bounce” on the news lately? Sounds kind of morbid doesn’t it? Well, in a way it is.

According to Investopedia, a Dead Cat Bounce is a slight recovery in a downturn followed by the continue fall of stock prices.

Wondering what you should do as we likely enter a recession? Check out the blog post here about creating a budget in a recession.

Morbidly – the term comes from the idea that if something (such as a dead cat) falls hard and fast enough, it will still bounce.

It makes sense right? – Not the dead cat part… but if you think about it in terms of the market, it’s pretty unlikely that you’d see weeks on weeks on end of all red days. There will be a few flat and even up days in the market, especially in our media driven world as people (the fed, the president, major company execs) make announcements on mitigation. Even if the overall trend is down.

The trend is often caused by investors closing out short positions. People wrongly assume that it’s the bottom, creating a small up tick and then further crash.

Technical analysts spend a lot of time analyzing these phenomenons. How do variations in trend affect the overall picture? Can you time a bounce like this? These are all things that technical analysts ask.

What should you do during a dead cat bounce?

Unfortunately, a bounce like this can only be identified after the fact. The best course of action is simply to stay the course!

Overall, it contributes to market volatility, but it’s a normal occurrence. Just be careful not to try and catch a falling knife! The best thing to do in these scenarios is wait it out and continue your normal investing strategies!

What are you doing during these uncertain times? Let us know your thoughts in the comments!