A dead cat bounce is a brief recovery in the price of an asset or market that has been falling sharply, followed by a resumption of the decline, often to new lows. The term is market slang used in equities, bonds, currencies and cryptocurrencies. It describes the trap faced by buyers who mistake a pause in a bear market for the start of a lasting recovery.
The phrase is usually traced to a December 1985 Financial Times report on the stock markets of Singapore and Malaysia, which quoted a market observer saying that the modest rebound after a steep fall was a "dead cat bounce". The image comes from the grim saying that even a dead cat will bounce if it falls from a great enough height. A dead cat bounce is the opposite of a genuine trend reversal, and the two can only be told apart after the fact.
Dead cat bounce in plain terms
Imagine a ball rolling down a long staircase. Every few steps it hits a landing and hops up a little, which might look, for a moment, as though it is heading back up. Then it carries on down. Someone watching only that one hop could easily misread what is happening.
A dead cat bounce is that hop on a price chart. After a big fall, some sellers are exhausted and some bargain hunters step in, so the price lifts for a few days or weeks. If nothing has actually changed about why the price was falling, the selling returns and the price drops further.
Why bounces happen in falling markets
Short, sharp rises are a normal feature of declining markets. Common causes include:
- Short covering. Traders who bet on a fall buy back to lock in profits, briefly adding demand.
- Bargain hunting. Investors who see the price as cheap buy in, often encouraged by slogans such as BTFD (buy the dip).
- Oversold signals. Momentum indicators such as the relative strength index (RSI) drop below 30, prompting technical traders to buy.
- Relief after a forced-selling wave. Once a cascade of forced liquidation has cleared leveraged positions, selling pressure can ease for a while.
None of these changes the fundamental reasons for the decline, such as falling profits, rising interest rates or, in crypto, a failed project or exchange. When the bounce runs out of new buyers, the price resumes its fall, and those who bought on the bounce become bagholders.
Telling a bounce from a recovery
There is no reliable way to know in real time whether a rise is a dead cat bounce or the start of a bull market. Analysts look for clues. A bounce on falling trading volume is often treated with suspicion, while a recovery accompanied by rising volume and improving fundamentals is taken more seriously. Some traders wait for the price to make a higher low and a higher high, or for a longer-term signal such as a golden cross, before calling a trend change.
These are rules of thumb, not tests. Many genuine recoveries began with moves that commentators dismissed as dead cat bounces, and many apparent recoveries later turned out to be bounces. The label is therefore used with most confidence by historians, and with least confidence by people trying to trade in the moment.
Examples in crypto markets
Crypto markets, with their high volatility and heavy use of leverage, regularly produce sharp bounces. During the 2018 crypto bear market, Bitcoin (BTC) rallied several times by tens of per cent before falling to new lows late in the year. In May 2022, the Terra project's LUNA token and its algorithmic stablecoin UST collapsed within days; brief jumps in LUNA's price during the collapse were followed by further falls towards an all-time low (ATL) of a tiny fraction of a cent.
Similar patterns often follow a rug pull or the failure of a token's backers: an initial crash, a short-lived rebound as speculators bet on a recovery, then a slide towards zero. Thin order books and low liquidity on small tokens make such bounces larger and more abrupt.
Risk management
Because a dead cat bounce looks like an opportunity, it carries particular risks for traders who buy too early. Common precautions include sizing positions within personal risk tolerance, using a stop-loss order, avoiding leveraged bets against an established downtrend and waiting for confirmation from more than one indicator. Long-term investors who intend to HODL regardless of short-term moves are less concerned with the distinction, though they still face the possibility that an asset never returns to its all-time high (ATH).