The Bottom or a Dead-Cat Bounce?
The market has been a roller-coaster the past 5-weeks. News headlines have driven us down and have propped us back up. This past week with the stimulus package (amongst other things) we experienced over a 20% rally. Sounds like a good sign, right? Well, the truth is, nobody really knows. This bump in the market has left all investors with one question: have we already seen market-bottom or was this a dead-cat bounce?
Market bottom is self-explanatory. It is simply, the lowest point the bear market reaches before the tide turns and we ascent into a bull market. A dead-cat bounce on the other-hand is a newer term. A dead-cat bounce is a temporary recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. So, essentially a false sign of hope.
Like stated above, nobody truly knows if we have seen market bottom or not, all we have to build on is historical data. For example, in the 2000-2002 Bear Market there were three separate 20% rallies that ultimately proved to be ‘head-fakes’ in a broader downturn. All three of the rallies were dead-cat bounces. But there is good reason to confuse dead-cat bounces with actual market bottom. When stocks do reach their bottom, they tend to see strong gains coming out of the gate. In almost every bottom since 1932, the stock market returned double-digit gains in the first 3-months.
So, in conclusion, for a third time, nobody truly knows if we have seen market bottom or a dead-cat bounce. There is still too much uncertainty surround the coronavirus and how long economies will remain shut down. There are signs and information that point to both ends of the spectrum.