Q. What is a Dead Cat Bounce?
A. A stock trading system based on the axiom: “Even a dead cat will bounce if you drop it from a great height.”
Investor slang: a brief recovery in the price of a falling stock.
Q. How does a Dead Cat Bounce?
A. A stock falls hard and fast. It then starts to recover with a sharp buying spree from bargain hunters.
Q. Why does the ‘Bounce’ end?
A. If other investors don’t follow the bargain hunters in buying the stock, the Bounce ends. Like a dead cat, the stock doesn’t have any momentum, and its price hits new lows. It doesn't have the juice to sustain its price.
Q. How do traders make money on the Dead Cat Bounce?
A. Traders playing the Dead Cat Bounce wait until the Bounce appears to have reached its height. Then they short-sell the stock, basically betting that the price will go further down.
Q. What’s an example of the Dead Cat Bounce?
A. Nortel Networks tumbled from $130 in 2000, to $30 a share. Investors who remembered Nortel’s glory days saw it as a bargain and bought it at $30. This caused a short-lived bounce before it fell even further to $1 a share, pushed there in part by traders playing the Dead Cat Bounce. Nortel Networks went bankrupt in 2009.
“If you threw a dead cat off a 50-story building, it might bounce when it hit the sidewalk. But don’t confuse that bounce with renewed life. It is still a dead cat.” -- Raymond F. DeVoe Jr, investment firm of Legg Mason Wood Walker