Don't Be Fooled by the Dead Cat Bounce

Includes: DIA, QQQ, SPY
by: Chris Wang

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:

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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.