What is a Dead Cat Bounce?

In the field of finance, the term "dead cat bounce" is a reference to a short period of recovery for a given security. Although there might be a temporary and modest rise in stock price for the security, the momentum quickly ceases and the price either levels out or begins to drop again. Generally, the degree of increase in the price of a stock is limited and might involve a stock that was not considered favorable in the first place. This term also can be used to describe the behavior of the stock market in general, such as when there is a temporary recovery in a market that has been declining. The gruesome name of this concept is based on the movement that might be expected when a dead cat is dropped from a height — it might bounce a little, but not much, before settling at a lower level.

Although the short period of increase followed by the decline of a stock is the essential nature of a dead cat bounce, the term is not applied to all stocks that follow this pattern. Generally, the term is used only with securities that are considered to be of low value even under the best of circumstances. When a low-valued stock enjoys a brief upswing in value for a short period of time and then returns to the previous and unspectacular price level that is the norm, the bounce is considered nothing more than an aberration and thus not of any real interest to serious investors.

Securities that are prone to a dead cat bounce share a few common characteristics. First, the securities are not held in high esteem, based on past performance. Second, there are no indicators that the securities in question are capable of attaining and sustaining a higher value in the current market. Last, there are no indicators that sustained growth would be achieved if some major economic shift occurred in the market. Essentially, the securities demonstrate no potential for rising in value and maintaining that higher price per unit.

In general, there is very little money to be made from a dead cat bounce. To achieve the maximum return on such a movement, the investor would need to buy just before the bounce commenced and sell off the shares just before the decline begins to take place. A dead cat bounce might occur over a period of time as short as two consecutive trading days, so the effort is rarely worth the return that is realized.