What Is a Dead Cat Bounce?
A dead cat bounce is a market trend where an asset with a falling price may have a slight recovery for a brief period of time before continuing to drop. It usually occurs during bear markets when asset prices are in free fall. However, it can also happen outside bear markets to individual assets rapidly losing value due to other factors.
Why Is It Called a Dead Cat Bounce?
A dead cat bounce is derived from the thought that even a dead cat would bounce back up if it falls from sufficient height. In market terms, it is a brief break in an asset’s downtrend, as traders wrongly assume the price has bottomed out; it usually involves the price charts briefly flattening, or even slightly elevating, rather than continuing to free fall. This leads to a transient increase in demand and a brief increase in price, followed by the asset succumbing to market conditions and dropping again.