There’s a saying in investing which states, “Even a dead cat bounces” in reference to a short-term reversal in trend. The context is saying that anything that is dropped from high enough will bounce. However, if the proverbial cat is still living and well, he would likely use one of his nine lives to land on his feet and continue on with his day. i.e., continue the upward movement, which in turn would become a new trend.
If a dead “cat” bounces, that means the market goes up momentarily and then back down to support (or perhaps below).
The Dead Cat Bounce often lures investors into FOMO (fear of missing out) mode, as they think the market is taking off without them, and thus they jump in only to find that the fundamentals didn’t actually support the trend reversal. The market then finds itself on the second half of bounce - back down to support, or perhaps below support. This decline ensues more selling, and thus continues the trend lower.
Only when the “cat” is alive and well can it land on its feet and continue the move upward so that it actually does become a true upward trend. This is what we saw in the beginning of 2020 when the COVID pandemic caused a serious downward reversal in the markets. The markets dropped considerably but bounced back shortly thereafter like nothing happened and continued the trend upward for a year. At that time, the economic backdrop was healthy and didn’t support the devaluation of Corporate America in order to make the downward reversal become a trend i.e., the cat got back on his feet and walked away.
As we saw in Jim’s most recent Seven Signs of a Changing Economy, the cat is not feeling 100% healthy today. He is bruised and battered and not in great shape to create a reversal quite yet. I wouldn’t consider him dead, but he should definitely visit a vet.
The moral of the story: don’t get faked out by the Dead Cat Bounce. It is normal, and expected, to see short-term reversals due to FOMO behavior. But if these reversals aren’t supported by key economic fundamentals, they will likely be short lived.
Only when we begin to see a true upward trend with supporting evidence do we plan to reinvest the cash we have on hand here at The Wealth Strategies Group.
I am interested in your thoughts, comments, and questions!
Brittany N. Jarocki, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Investing involves risk. Loss, including loss of principal, may occur. No strategy assures success or protects against loss. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.