- Traders wonder if Wednesday’s rally was a “dead cat bounce.” The term originated in the 1980s and is a familiar sight to long-time market observers.
The Nasdaq index surged 12% Wednesday, recording the second-best trading day on record. The Dow and S&P 500 also roared back after several days of massive losses following Donald Trump’s tariff announcement. So why isn’t everyone celebrating?
Put simply: A massive rally doesn’t mean the days of big drops are over. It could be, in fact, that the volatility is just getting warmed up.
What is a dead cat bounce?
A big gain amidst a bear market is called a “dead cat bounce” by traders. It’s a short-lived recovery amidst a prolonged decline in markets, born of the theory that even a dead cat will bounce if it falls far enough. (Wall Street doesn’t always see eye to eye with the ASPCA.) It’s also called a sucker’s rally, or a relief rally.
The dead cat bounce can apply to both markets as a whole or single stocks that are in decline.
What are some examples of past dead cat bounces?
The dead cat bounce is something that’s very familiar to long-time market watchers. During the 2008 financial crisis, the Nasdaq had two of its best days ever. The same thing happened during the dot-com bust in 2001.
Thursday’s market open certainly points to Wednesday’s surge being a short-term event. The Dow, Nasdaq, and S&P were all significantly lower in early trading.
How do you identify a dead cat bounce vs. a market rally?
Technically, Wednesday’s stock surge is not, as of Thursday morning, a dead cat bounce. That term won’t apply until index levels are below their previous low. That’s why dead cat bounces often aren’t recognized until some time after they occur.
Market rallies are sustained gains in index and stock prices.
What causes a dead cat bounce?
Dead cat bounces often occur as investors with short positions unload their holdings, betting that the market has hit its bottom. The herd mentality of Wall Street can amplify the effect.
Typically, those bounces come from a variety of factors, ranging from short selling to market manipulation to (temporarily) improved market sentiment. Wednesday’s boost, regardless of whether it was a dead cat bounce or not, came from a new source: Donald Trump’s post on social media, announcing a 90-day pause in reciprocal tariffs.
Who came up with the term dead cat bounce?
The odd terminology was born in the 1980s, when Wall Street analyst Raymond DeVoe Jr. used it in a note to warn about an uptick in a stock that had been on the decline. “If you threw a dead cat off a 50-story building, it might bounce when it hit the sidewalk,” he wrote. “But don’t confuse that bounce with renewed life. It is still a dead cat.” (DeVoe was also the founder of a price index he called the Trivia Index, which monitored things like the price of haircuts and pizza slices.)
