What is a dead cat bounce? Investing Explained

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s dead cat bounce.

Call the RSPCA! 

The term – which some find tasteless – is a piece of stock market slang.

It is often heard when stock markets stage a brief comeback at a time when pessimism and woe have driven share prices lower and is based on the idea that even a deceased feline will bounce if dropped from high enough. The point is, that it is a short-term reprieve, rather than a real revival. 

You will hear ‘dead cat bounce’ in reports about the direction of commodities, currencies and the economy. It is also seen in assessments of the fortunes of football clubs and politicians. There is no respect, it seems, for the feelings of cat lovers. 

Rebound: When markets are in a downward trend, as at present, everyone is looking for the ‘bear-market bottom’

Where did the phrase originate?

It emerged in London in the 1980s, as the era of stock market deregulation, ‘the Big Bang’, approached. Some of the treatises on the term (yes, historians of language have made a study of this) say that it was first used in print in 1985 during a period of stock market volatility. 

But it seems to have actually appeared in a report in the Guardian in September 1981, a period of mass unemployment and severe recession. Americans soon adopted the term – with considerable enthusiasm. Lately it has appeared in many social media discussions of the fortunes of bitcoin.

Why am I hearing it so much now? 

When markets are in a downward trend, as at present, everyone is looking for the ‘bear-market bottom’. This is the moment of capitulation that comes when investors start to become more optimistic about the outlook. There are many false dawns along the way to this much-anticipated moment and dead cat bounce is a shorthand way to refer to these brief rallies. 

One commentator acknowledged the aptness of the term, while conceding that it was ‘a super gross visual’. Cat lovers, who would probably prefer the term ‘relief rally’, will agree.

What’s a bear market? 

If a market has dropped by 20 per cent from its previous highs, it is described as a ‘bear’ market. The animal kingdom is a rich source of terminology for investors. 

For example, Jordan Belfort, the controversial trader, called his biography, later made into a film, The Wolf Of Wall Street.

What causes a dead cat bounce? 

In a downturn, participants in a market are hoping for the end of the bad times and may overreact to a snippet of good news that seems to presage the return of optimism. 

However, a dead cat bounce may be caused by traders covering their short positions. They have ‘shorted’ shares, that is agreed to sell them in the future at a lower price, in the belief that these stocks’ prices were set to decline. 

The price of the shares has risen instead, compelling the traders to pay a higher price in order to secure the shares that they need to ‘close the position’ – that is to complete the contract. 

This has the effect of further pushing up the price of the shares, creating the illusion of recovery.

This post first appeared on Dailymail.co.uk