A strange phenomenon that occurs at times of market decline, we’re going to look at what exactly is a Dead Cat Bounce
If a dead cat falls from far enough and is going fast enough, it will bounce. That’s the theory anyway, not to be confused with Dead Cat Strategy; who knew dead cats had such metaphorical use? A Dead Cat Bounce is a brief recovery in the price of a declining equity or asset class. The rally is usually short-lived, followed by a further decline.
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What makes it a Dead Cat Bounce and not a reversal is when the price of the equity drops below the initial price at which it rallied. Traders try to identify the event as it happens in order to find quick, short-term gains, as well as shorting opportunities. However, the main difficulty here lies in the fact that it is impossible to indicate whether a rally is a Dead Cat Bounce or not until after the fact. Much like trying to time when the market hits bottom, attempting to identify one could prove a costly folly for the over-confident investor.
An Example of a Dead Cat Bounce
Now, the idea of chart analysis gives me the heebie-jeebies (don’t come at me with a cup-and-handle unless it’s filled with coffee!) but I do feel it’s quite easy to identify a dead cat bounce. If you look at Blue Apron’s (NYSE: APRN) chart, from the start of April to the end of September 2018 you can see a prime example of our deceased feline friend. You would be forgiven for seeing a resurgence in a former high-flying stock and smelling a pre-packaged bargain. However, if you bought at the peak of that 6 month period, your investment would have fallen 95.66%.
Is this a warning?
The word ‘warning’ sounds a bit dour. In spite of some of my recent articles, I am actually an optimist. However, I do feel there is a risk for us retail investors getting carried away by the momentum of bigger, macro-economic factors that are outside our circle of competence. Perhaps precaution might be the more apt term. So take this as a precaution to be wary of pouring into the markets in a time of such volatility.
Maybe I’m more of a realist actually.
The speed at which the market sell-off occurred last week has never been seen before. The Dow Jones Industrial Average (INDEXDJX: DJI) set two records in the past three days of trading: on Thursday it lost the most points in a single trading day; yesterday it gained the most points in a single trading day. Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL), two of the three biggest companies in the world, saw one-day growth yesterday of 7% and 9% respectively. That’s almost $200 billion created. Crowd favorite, and as a result overpriced, stocks like Tesla (NASDAQ: TSLA), Advanced Micro Devices (NASDAQ: AMD), and Nvidia (NASDAQ: NVDA) have all seen big resurgences since the end of last week.
These types of figures are unsustainable and should come as a warning to the sustained volatility which we are to be exposed to. Could this week be the beginning of a Dead Cat Bounce, or will it be the platform from which we dive into another ten years of this magnificent never-ending bull market? I know which direction I’m leaning towards.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Apple, Microsoft, and Tesla. Read our full disclosure policy here.