Don't Be Fooled by the Dead Cat Bounce

The S&P 500 rallied over 20% over the past couple of weeks and all of a sudden people are calling for a market bottom. Investors believe that if they miss the turn, they’ll lose the opportunity to recover their losses. However when you try to catch a falling knife, you will get hurt.

Here are statistics from bear market rallies of at least 20% from the Great Depression:

The Dow trough was July 8, 1932 at just 41. If you bought into any of the above rallies, you suffered at least 50% losses in the end.

So let’s look at the statistics from our current bear market:

Today you have to decide whether this is a rally based on nothing or if it is in fact a market turn. The media will certainly entice people into bear market rallies as investors are conditioned to dream about making a quick buck. That’s how people are sold on Las Vegas, Mega-Million Jackpots, or Flip This House. While people dream of getting rich quick, these scenarios almost never pay off, yet you still dream of being the one. Reporters from CNBC, Fox and CNN will want to be the first to call the bottom if they see a minor change in economic numbers and viewers will be tempted to get back in. Because of this, there will certainly be more 20% rallies to come.

Comments

[y3115y:]

I love your numbers, and agree with you 100%.

Mar 22 08:27 AM

[socrateazz:]

I may be wrong. but I do agree this is a dead cat bounce. I do think there is more upside in this move, maybe even 20% but reality will bring things back down. Obamanomics is based on belief reality. When it becomes based on actual reality then things will improve for the long term. You can tell me a sick cat is getting better, but until the cat actually improves, The cat is still at risk. The medicine I have seen for this economy is actually a toxin that makes things look better. Morphine makes you feel better. Does it really help the disease.

Mar 22 09:01 AM

[investor88:]

Agree look before you leap. May be another of those failed rallies but no telling if it will go up further.

Mar 22 09:08 AM

[pelican:]

I'd like to see how many bear market rallies of 20%+ occurred during the bear markets of 73-74 and 81-82, not just during the Great Depression. Their are similarities with the Great Depression but there are many differences, so I don't think using it as the yardstick is necessarily appropriate. That said, if the Great Depression represents the worse case scenario, where the market tanked due to the economy (worse than today) and rich valuations (higher than those at 2007's peak), then the current market should bottom before the 35 months it took during the Depression. If it takes 26 months, for example, it would mean the market will bottom at year-end. By the way, the author makes it seems as if there is a lot more bullishness out there now that the market has rallied but I'm not seeing that, at least not on this website.

Mar 22 09:32 AM

[Jim O:]

That's right! As Ted Kennedy so famously put it, "the dream will never die."

Mar 22 09:35 AM

[Brekeen:]

You are out to lunch with the vast majority in your prediction....We are heading toward the greatest rally since the Great Depression. Then late summer/fall we will continue a slow and tedious downtrend lasting up to two years....It's all about where you get your information from. I find most editorialists take an inside the box view based soley from reading their own peer group....sad.....

Mar 22 09:36 AM

[mollytjm:]

for value investors, it's a good time to shop. even if the market does go lower, as it probably will, in the years to come, it will go up again...just make sure the company you invest in really does have $$$ and no debt, is a well known name with a good reputation.
i'm happy to NOT be a day trader...has to be scary these days!
i'm long APPL...even with competition and a slower economy, they will lead the pack and they are loaded with profit and cash. They still make more profit per square foot of retail space than anyone else...something Sears would like to be able to say.

Mar 22 10:40 AM

[Asbytec:]

Nope...still gotta long way to go before bottom. A lot of volatility out there and investors (and you and I) are trying to predict uncharted waters. You'll see. Too many things are not acting as they should normally. We should be in an inflationary period. That we're not, this alone says we're not in normal market conditions.

I do not believe a bottom is possible until we start seeing the economy behave as it should. It ain't, and it won't be until the financial markets come out of a coma. That's why predictions of anything, including the dollar and the markets, are more apt to deal us one surprise after another...yet to come. Call it what it is, a dead cat bounce...and it ain't Obama's fault.

He appears not to care about what the markets are doing, other than an indicator of what might be happening in our fundamentals. Even that is not a sure sign of anything. He's focusing on spending on fundamentals, and I think that is good. We can deal with debt and inflation later. Let's get our productive base up to speed and stop relying entirely on unregulated paper to make (a few of) us rich.

Mar 22 10:41 AM

[toobad41:]

I hate that term "dead cat bounce". Dead cats don't bounce...they go splat. Especially for a total market view. For a single stock you can use the term if you want to but for a market index? It makes no sense to me. Also you compare the Dow of the Great Depression of the late 1920's and 30's with todays S&P 500 !! That makes no sense at all either. The Dow of the past does not even resemble the Dow of today. Not only that the S&P 500 did not even exist in the late 1920's or early 1930's. You are comparing things that are not comparable. Even the percentages you use are not comparable either.

Mar 22 10:49 AM

[IrisWall:]

Its not that hard. When he 50 day exponential moving average crosses the 200 day simple moving average - this is the top (crossing down) or the bottom (crossing up). Weekly or monthly charts - NOT daily charts. People want to be in a hurry to catch the top or bottom and get hurt. If they stick to catching the middle they will do fine. We are no where near a cross going up right now. Sorry for the bad news.

Mar 22 11:25 AM

[dcb:]

Silly debate because nobody knows. play the bounce, watch tecnical signals and try to make a profit. keep tight stop loss values.

Mar 22 11:59 AM

[LostJedi:]

Agree with the writer.. But ... If Geithner announces a great toxic asset plan for banks this coming week, would that not help add some extra legs to the current 'dead cat bounce' ?

Mar 22 01:16 PM

[PROXIMO:]

Nice comparison of two different eras.

Mar 22 02:03 PM

[ebworthen:]

Wha? You are agreeing with him. "Greatest Rally" then a
"slow and tedious two year downtrend", not much different from what he is saying.


On Mar 22 09:36 AM Brekeen wrote:

> You are out to lunch with the vast majority in your prediction....We
> are heading toward the greatest rally since the Great Depression.
> Then late summer/fall we will continue a slow and tedious downtrend
> lasting up to two years....It's all about where you get your information
> from. I find most editorialists take an inside the box view based
> soley from reading their own peer group....sad.....

Mar 22 02:17 PM

[chinooking:]

according to your stat's we are 180% away from the bottom,,,lmao get a day job

Mar 22 04:07 PM

[JGatsby:]

your are getting to get your shorts handed to you!

Mar 23 11:39 AM

[jr007:]

This market has no comparison in the past..in the past... and hopefully in the future. Tough to predict but things seem to be getting better. At least Obama has iintelligent people working on it. Nothing could be worse than the last 8 years of lunacy. We survived and hope to do better now.

Mar 23 01:35 PM

[Asbytec:]

Jr007, I have to agree...despite all the Obama bashing, right wing emails floating around the internet, I think Obama is on top of this crisis, rightly or wrongly, and probably both. But, he is acting decisively. Label it what you will, but I like what I hear coming from the White House...despite it's faults, such as artificial housing bottom, etc.

I am beginning to suspect this dead cat bounce has something fundamental to it. We may see rallies like this, then some pull backs, for some time yet. But, I think some investors, including some sideline money, may have bought into some long positions in preparation for an inevitable market recovery. It might not be the perfect time to buy, but it is a good time, as one poster said. I know people, including myself, who are eager to get it even at the risk of future loss. I am sure we're not alone.

That being said, we are a long way from being back to normal. Can you imagine if this rally continued for a couple of weeks? We'd be at 14000 before June...LOL Ain't gonna happen, though. There should be some major pull backs before then.

Mar 23 10:39 PM