Glossary
Dead Cat Bounce
A brief, short-lived rebound in a falling stock or market that fails and gives way to further declines.
A dead cat bounce is a short rally inside a larger decline that fades and leads to new lows. The grim name comes from the trader's saying that even a dead cat will bounce if it falls far enough. The term is only ever applied in hindsight: at the moment a falling stock rebounds, no one can know whether it is a bottom or a bounce.
What it looks like
A stock or index drops hard, often on bad news, then rises for a few days or weeks as short sellers cover and bargain hunters step in. The rebound stalls below an earlier Support level that has now turned into Resistance, often on lighter volume than the selloff, and the decline resumes.
Bear markets are full of them. During the 2000–2002 and 2007–2009 declines, the Nasdaq and the S&P 500 each had several rallies of 10% or more that later gave way to fresh lows.
How traders tell the difference
There is no reliable test, but analysts look at a few things:
- Volume: rebounds on thin volume after a heavy-volume drop are treated with suspicion.
- Structure: a Downtrend stays intact as long as the bounce makes a lower high below the last swing peak.
- Breadth: a recovery led by only a handful of stocks is weaker than a broad one.
- Cause: a business problem that has not been fixed tends to reassert itself.
The idea is a useful caution against assuming that a large fall makes a stock cheap. It is also easy to overuse; plenty of sharp rebounds turn out to be real bottoms.