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Holly's Blog: Dead Cat Bounce

11 July, 2017

October has been a spooky month for investors. The FTSE 100 fell by about 6% and it was the worst calendar month for global shares in years. However this week things revived, leading investors to ask if the upward climb will continue, or was this a dead cat bounce?

Let’s start this week with a quiz. When economists talk about a Dead Cat Bounce are they referring to:

  1. Their pet’s reaction to a 72 minute Budget speech

  2. Slower Computational Algorithmic Trading

  3. Chucking Moggie out of a window onto the ground below?

Somewhat bizarrely it is the latter.

A dead cat bounce describes a very short-term uplift in a market which has been falling. It can deceptively look like a rebound, but then things start to fall again.

It literally means that if you found yourself in the possession of an inanimate feline domestic pet, and also happened to find yourself on the roof of an extremely tall building - and should you furthermore decide to throw said dead feline off the roof - then on contact with the ground it would bounce. However this would not be a miraculous resurrection but a mere conversion of kinetic energy. And then post bounce it would fall again.

In many professions such an analogy would lead to counselling and potential sectioning. In finance it leads to a guest column in the FT and invitations to lecture. Drop this into conversation with the next stock market bore you meet, and watch their newfound admiration!

October has been a spooky month for investors

The FTSE 100 fell by about 6% and it was the worst calendar month for global shares in years.

Things spooking investors are concerns that company earnings may have peaked, sky high tech stock valuations and the fact that interest rates are gradually creeping up – which can dampen corporate growth plans. The International Monetary Fund (IMF) has also significantly downgraded its global growth expectation for 2018 and 2019.

However on Wednesday this week, things revived and a note of optimism returned – leading to animated debate about whether the march North continues, or was this indeed a dead cat bounce?

Sudden price drops grab investors’ attention, create headlines and spread fear. Excessive fear almost always washes out the more panicky investors who freak out and sell, providing buying opportunities for the longer-term and stronger-stomached investors. This can create strong rebounds. The small recovery continues today, largely because Donald Trump has decided to play temporarily nicely with Mr Xi on Twitter, abating fears of trade wars.

I don’t personally see things running out of steam just yet. So at this stage, I’d say that there is life in the old kitty yet and this is more than a bounce. But trying to predict cats is like trying to predict the markets – pointless, and they will end up making you look foolish as they watch with disdain.

A final cat tip

Starring in this week’s picture is Boring cat, Mog. She’s also on our website as our CFO ( Feline Officer). This is this best protection against fraud any company can have – those phishing emails asking Mog to arrange immediate bank transfers are a bit of a give away.

P.S. We continue to collect your reviews of investment services you use. If you can, we’d love to get your opinion on the service you use – would you recommend them and how well are they doing? Helps others to choose, and helps us to call out the good, the bad and the ugly.

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