A dead cat bounce is a financial colloquialism describing a sharp increase in share prices after a major decline. It originated from an old Wall Street saying: “Even a dead cat will bounce once if it falls far enough.”
What is a dead cat bounce?
- A dead cat bounce is a temporary increase in share price in the middle of a price decline, observed in entire sectors or the broader market.
- A dead cat bounce is temporary because the change in share price is not related to change in the underlying value of the market.
A dead cat bounce, also known as a “sucker rally,” is a slang financial expression describing a sharp but temporary increase in share prices after a major decline. A dead cat bounce may describe the price movement of a single stock, but it often applies to the movement of a sector or the entire market as in the case of recessions and bear markets, with those observed under the latter classified as “bear market rallies.”
Dead cat bounces may arise because of investor psychology. When investors are convinced that the market has bottomed out, demand will increase because they want to “buy low and sell high.” Since demand increases, the share price will rise, although this improvement is only temporary because the underlying value of the market is unchanged.