A Dead Cat Bounce (DCB) refers to a rebound for the short term from a decreasing trend. It represents an occurrence that is singular to certain bearish markets.
A good example of a dead cat bounce is the serious slides in six weeks during the year 2000. From the periods of September 1 to October 17, 2000, the Nasdaq dropped by 27 percent, the Dow Jones slipped by 12 percent, and the S&P 500 decreased by 12 percent. Though the markets are greatly inflicted by the phenomenon, it was not considered odd in fiscal history.
It is expected that a bearish market or negative conditions follow a bullish market or positive movements of indices. Thus, it is simply the economy’s normal cycle.
Nonetheless, the serious beating recorded in 2000 could be regarded as a dead cat bounce. After a drop in six weeks straights, the market exhibited a strong recovery. After a series of declines, the Nasdaq yielded 7.78 percent rally. However, this improvement is considered to be short-lived. Major indices are reported to have extended their slides.
A dead cat bounce occurs at a time when most fervent bears reassess their statuses in the pessimistic market. Most bears clear out their short-term positions when the trade closes down for six consecutive weeks to lock in gains. Yet, the value investors may begin to deem the bottom has been touched. Consequently, they shift to the currency, stock, or commodity that is forecasted to rise.
The momentum investor is the final participant of the dead cat bounce. Typically, this trader considers signals and finds oversold metrics. The aforementioned factors take part in causing abrupt buys, even for a short period, which cause the market to become bullish.
Due to recast of market outlook, maintained reversal is achieved by the market. After a drop for a long time, the trade could either recover for a short term or penetrate a new phase in its cycle.
It is indeed difficult to determine whether the market is experiencing a reversal or a dead cat bounce. There is no secret to identifying a market bottom. Nonetheless, it is essential for investors to understand a dead cat bounce since it influences their returns based on their investment style.
A dead cat bounce could either be a good or bad thing depending on your consideration. There are traders who prefer volatility, which means the occurrence is advantageous for them to make money. On the other hand, long-term investors may find it hard to obtain solace when a dead cat bounce happens. To survive, they should think ahead and diversify their portfolio.
Do you now know how to spot a dead cat bounce on a chart?
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