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The Dead Cat Bounce

Trading is well-known for having a lot of colorful slang that is particular to it. This one might be the darkest and oddest out there.

In 1985 the stock markets in Malaysia and Singapore were experiencing a recession. Late in the year, these markets were being reviewed by a pair of journalists, Wong Sulong and Horace Brag just at the time when the recession experienced a small uptick after its long fall.

These journalists from the Financial Times then added a surprise by describing this situation using a term they had coined. They described the way the price moved as a “dead cat bounce”. The idea behind this phrase is that even a dead cat will bounce if you drop it from high enough.

Clarifying the meaning, this term can be used when either an asset or a market experiences an uptick after a long fall. It also implies that the falling price is legitimate and that there is a reasonable expectation it will be seen falling further after the bounce. In other words, the turnaround shown by the bounce is temporary. This makes the “dead cat bounce” a phrase more useful for describing past price movements rather than predicting them, since it is generally difficult to be sure that the recovery is temporary.

A similar phase that might be used in this case is a “Sucker Rally”. Based on the presumption that the downward trend is reliable, investors would be suckers to buy in after seeing a dead cat bounce, as its presumed further falling will come next. When you see a possible dead cat bounce, consider being more of a dog fan.

See in: Informative

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