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don’t get fooled by the dead cat bounce

don’t get fooled by the dead cat bounce

temporary price corrections in stocks could be triggered by speculation.
March 6, 2022
3 min read
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temporary price corrections in stocks could be triggered by speculation.

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there is a theory that if a dead cat falls far enough, it will bounce. this applies to the equity markets too. a stock that is on a decline suddenly shows an upside swing. Investors get excited and pump in money. soon after, it goes back to the falling phase.

the Dead Cat Bounce in stocks often confuses market participants. here, a poor-performing stock surprisingly starts to rally, raising equity investors’ hopes. but the trigger could have been a temporary stimulus/government action or simply speculation by brokers to build volumes, leading to a price spike. when the trigger situation eases, the prices slide again, wiping out millions in investor wealth. 

Indian investors saw a glimpse of this situation in September 2021 when telecom companies were given a four-year moratorium to pay adjusted gross revenue dues. the stocks started to rise soon after, only to begin their downward trajectory just two months later. 

crypto bouncing

similar comparisons are now being made to Bitcoin too. BTC has seen its share of ups and downs in 2021 and in January 2022. market experts have pointed to a Dead Cat Bounce in cryptocurrencies as well. 

American stockbroker and bitcoin critic Peter Schiff took to Twitter to explain that the dead-cat bounce in Bitcoin was over. Schiff is of the opinion that with this bounce period coming to an end, there could be a decline in the cryptocurrency’s price.  

for investors looking to enter a stock or reassign sectoral holdings, it is important to watch out for the dead cat bounce moment. in the BTC world too, the same principles apply. observing the trends for four to eight weeks before taking positions would be a wise move.