What is a Dead Cat Bounce?
A Dead Cat Bounce is a term used in financial markets to describe a temporary recovery of a asset that has been in a long-term downtrend. It's called a "Dead Cat Bounce" because even a dead cat will bounce if it falls from a great height, but it's still dead.
The idea behind a Dead Cat Bounce is that an asset that has been in a long-term downtrend, like a cryptocurrency token that has been going down in value for a long time, may suddenly seem to recover for a short period of time. This recovery may make it look like the asset is starting to go up in value again, but it is usually only temporary. After the short-term recovery, the asset's value will continue to go down.
For example, imagine that an asset has been going down in value for several months. Suddenly, the asset starts to go up for a few days, and it may seem like the stock is starting to recover. But then, after a few days, the asset's value starts to go down again. This could be a Dead Cat Bounce.
Simplified Example
A dead cat bounce is like when you drop a ball and it bounces for a little bit before it stops. Just like how the ball bounces a little bit after you drop it, the stock market can also "bounce" a little bit after it goes down. But just like how the ball will eventually stop bouncing and stay still, the stock market will also eventually stop going up and go back down again.
In other words, a dead cat bounce is a short-lived recovery in the price of an asset or security after a significant drop. Just like how a ball that's dropped will briefly bounce before losing its energy, a stock or market that has gone down will briefly recover before continuing its downward trend.
History of the Term Dead Cat Bounce
The term "Dead Cat Bounce" originated in financial markets, particularly in stock trading, and gained prominence in the late 20th century. It refers to a temporary and short-lived recovery in the price of a declining asset after a significant drop. Traders and investors use this term to describe a momentary uptick in the price of an asset that has been in a prolonged downward trend, often indicating a brief resurgence before resuming its decline. While its exact origin remains unclear, the term became widely recognized in financial circles as a cautionary reminder against mistaking such rebounds for a sustained recovery, emphasizing the transient nature of the price increase.
Examples
Stock Market Dead Cat Bounce: This refers to a temporary rebound in the stock market after a significant downturn. For example, during an economic recession, stocks may experience a steep decline in value, but then recover briefly before continuing to drop. This temporary recovery is known as a dead cat bounce, as even a dead cat will bounce if it is thrown from a high enough building. In this case, investors may feel hopeful about the rebound, but the reality is that the market will likely continue to decline.
Commodity Dead Cat Bounce: Commodities, such as oil, gold, and silver, can also experience a dead cat bounce. For example, the price of oil may plummet due to a supply glut, but then briefly recover as a result of a geopolitical crisis. In this case, the temporary rebound may be short-lived as the underlying issue of oversupply remains unchanged.
Business Dead Cat Bounce: A business can also experience a dead cat bounce if it sees a temporary improvement in sales or profits after a long period of decline. For example, a struggling retail company may experience a short-term increase in sales during the holiday season, but this does not necessarily mean that the company is on the path to long-term recovery. In this case, the business may need to make significant changes to its strategy and operations in order to achieve sustainable growth.
Related terms
Bull Trap: A bull trap is an investing term used to describe a situation in which the price of a security shows signs of increasing but then quickly reverses and falls.
Day Trading: Day trading is a way of buying and selling assets quickly in order to make a profit.