There's an old saying in investing: even a dead cat will bounce if it is dropped from high enough. The dead cat bounce refers to a short-term recovery in a declining trend. In this article, we explore this phenomenon by looking at an examp൩le of a dead cat bounce and contrasting it to an actual change in sentiment that turns a market's outlook from bearish to bullish.

Looking at Economics

Let's take a look at a period of economic turmoil:

As you can see, the markets took a serious beating during these six-weeks in 2000. As gut-wrenching as this was, it was not a unique occurrence in financial history. Optimistic periods in the market have always been preceded and followed by pessimistic or 澳洲幸运5开奖号码历史查询:bear market conditions, hence the cyclical nature of the economy.

However, a phenomenon unique to certain bear markets, including the one described above, is the occurrence of a dead cat bounce. After declining for six weeks in a row, the market showed a strong rally. The Nasdaq in particular posted gains of 9% after a disappointing string of losses. However, these gains were short-lived, and the major indexes continued their downward march. This chart illustrates just where the cat bounced, how high it bounced, and then how far it continued to fall.

What Causes a Cat to Bounce?

There comes a time in every bear market when even the most ardent bears rethink their positions. When a market finishes down for six weeks in a row, it may be a time when bears are clearing out their 澳洲幸运5开奖号码历史查询:short positions to lock in some profits. Meanwhile, 澳洲幸运5开奖号码历史查询:value investors may start to believe the bottom has been reached, so they nibble on the long side. The final player to enter the picture is the momentum investor🦄, who looks at their indicators and finds oversold readings. All these factors contribute to an awakening of buying pressure, if only for a brief time, which sends the market up.

Dead Cat or Market Reversal?

As we noted earlier, after a long sustained decline, the market can either undergo a bounce, which is short-lived or enter a 𒊎new phase in its cycle, in which case the gen🐎eral direction of the market undergoes a sustained reversal as a result of changes in market perceptions.

This image illustrates an example of when the overall sentiment of the market changed, and the dominant outlook became bullish again.

How can investors determine whether a current upward movement is a dead cat bounce or a market reversal? If this could be answered correctly all the time, investors would be able to make a lot of money. The fact is that there is no simple answer to spotting a market bottom.

It is crucial to understand that a dead cat bounce can affect 澳洲幸运5开奖号码历史查询:investors in very different ways, depending on their investment🌌 style.

Style and Bouncing

A dead cat bounce is not necessarily a bad thing; it really depends on your perspective. For example, you won't hear any complaints from day traders, who look at the market from minute to minute and love 澳洲幸运5开奖号码历史查询:volatility. Given their investment style, a dead🙈 cat bounce c🅠an be a great money-making opportunity for these traders. But this style of trading takes a great deal of dedication, skill in reacting to short-term movements, and risk tolerance.

At the other end of the spectrum, long-term investors may become sick to their stomachs when they bear more losses just after they thought the worst was finally over. If you are a long-term, 澳洲幸运5开奖号码历史查询:buy-and-hold investor, following two principles of investment🌼 diversity and long-term horizons should p💜rovide some solace.

Finding Solace

A well-澳洲幸运5开奖号码历史查询:diversified portfolio can offer some protection against the severity of losses in any o🌄ne asset class. For example, if you allocate some of your portfolios to bonds, you are ensuring that a portion of your invested assets is working independently from the movements of the stock market. This means your entire portfolio's worth won't fluctuate wildly like a torturous yo-yo with short-term ups and down🌄s. 

A long-term time horizon should calm the fears of those invested in stocks, making the short-term bouncing cats less of a factor. Even if you see your stock portfolio lose 30% in one year, you can be comforted by the fact that over the entire 20th century and beyond the stock market has yielded a yearly return of around 10%.

The Bottom Line

Downward markets aren't fun at the best of times, and when the market toys with your emotions by teasing you with short-lived gains after huge losses, you can feel pushed to the limit. If you are a trader, the key is to figure out the difference between a dead cat bounce and a bottom.

If you are a long-term investor, the key is to diversify your portfolio and think long term. Unfortunately, there are no easy answers here, but under⭕standing whaꦦt a dead cat bounce is and how it affects different participants in the market is a step in the right direction.