What Is a Dead Cat Bounce? Here’s What Investors Should Know
Written by
Gina Hagler
Edited by
Travis Woods
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After months of disappointing news and poor performance, the stocks you’ve been following are suddenly selling at the highest prices you’ve seen. As a cautious investor, you can’t help but wonder if the increase is due to something that will last or just a too-good-to-be-true blip.
Before you make a move, you need to know more about what can cause this behavior, so that you can differentiate between a sign of sustained improvement or a “dead cat bounce.”
What is a Dead Cat Bounce?
According to Investopedia, a dead cat bounce is “when a stock has declined, but then briefly rallies, often before resuming its downward trend.” The rise in price is shortlived because “investors see some positive news and think the company is turning a corner, only to be disappointed when it doesn’t.” The ability to spot a dead cat bounce makes it possible for you to sell your stock at a higher price but only for a limited time.
How Can You Recognize a Dead Cat Bounce?
By definition, this price movement is shortlived, so you’ll need to act in a timely manner if you’re going to take advantage of the increase. You can prepare ahead of time by keeping an eye on your portfolio with these things in mind:
Historical Performance
If a stock is historically a steady performer and suddenly shows an increase in price, it’s time for a closer look.
Market Performance at the Moment
If the entire market is moving, that won’t tell you as much as if your stock is among the few that move.
Analyst Recommendations
You may see that analysts are weighing in on your particular holding, and that may give you some useful insight.
PE Ratio
If the PE ratio on your stock is suddenly much greater than it has been, it’s more likely that the price increase is not due to a fundamental change in the company’s value.
What Does it Mean for You as an Investor?
If you’re prepared with a plan for your portfolio, you will be in a position to know whether this is a stock you are open to selling. If it is, this could be an excellent time. On the other hand, if it’s a stock you’re interested in purchasing, this might be the moment before a drop that will make it an attractive acquisition.
Bottom Line
As with most things in the investment world, a dead cat bounce is only good or bad relative to your personal investment objectives. The better able you are to recognize events like a dead cat bounce, the better able you will be to make informed decisions that align with your goals.
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