Dead cat bounce
From Wikipedia, the free encyclopedia
In economics, a dead cat bounce is a small, brief recovery in the price of a declining stock.[1] Derived from the idea that "even a dead cat will bounce if it falls from a great height", the phrase, which originated on Wall Street, is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline.
History
The term "dead cat bounce" is derived from the idea that "even a dead cat will bounce if it falls from a great height."[2] The phrase has been used on Wall Street for many years. The earliest use of the phrase dates from 1985 when the Singaporean and Malaysian stock markets bounced back after a hard fall during the recession of that year. Journalists Horace Brag and Wong Sulong of the Financial Times were reported as saying the market rise was a "dead cat bounce."[3] A similar expression in Cantonese has an older history and this may be the origin of the term.
[edit]Variations and usage
The standard usage of the term is: A short rise in price of a stock which already suffered a fall. In other instances the term is used exclusively to refer to securities or stocks that are considered to be of low value. First, the securities have poor past performance. Second, the decline is "correct" in that the underlying business is weak (e.g. declining sales or shaky financials). Along with this, it is doubtful that the security will recover with better conditions (overall market or economy).
Some variations on the definition of the term include:
- A stock in a severe decline has a sharp bounce off the lows.[4]
- A small upward price movement in a bear market after which the market continues to fall. [5][6]
[edit]Technical analysis
A "dead cat bounce" price pattern may be considered part of the technical analysis method of stock trading. Price patterns such as the dead cat bounce are recognized only with hindsight. Technical analysis describes a dead cat bounce as a continuation pattern that looks in the beginning like a reversal pattern. It begins with a downward move followed by a significant price retracement. The price fails to continue upward and instead falls again downwards, and surpasses the prior low.[7]
By Myra P. Saefong, MarketWatch
Oct. 12, 2012, 8:00 a.m. EDT
Gold’s primed for a breakout, but where to?
Commentary: Metal is trading just a stone’s throw from a record level
Reuters
SAN FRANCISCO (MarketWatch) — Gold is primed for a breakout.
Just a stone’s throw away from a record level, gold prices may be ready to break free from the trading range they’ve been stuck in for months.
“Concerns about overall global economic health have kept gold in a pretty tight trading range, but this is typical just before some type of breakout, up or down,” said Nathan Rowader, portfolio manager of the Forward Commodity Long/Short Strategy FundFCOMX -1.09% . “Right now, the weight of the evidence points toward higher prices.”
For more than a year, gold futuresGCZ2 -0.86% have been trading within a less than $400-an-ounce range — between an intraday high in electronic trading of $1,909, reached on Aug. 23, 2011, and an intraday low of around $1,525, seen on Dec. 29, 2011, according to the CME Group CME -0.37% .
Gold’s “return to near $1,800 is a sign that some rationality has returned to the market,” said Dawn Bennett, portfolio manager of the Bennett Group of Funds.
Gold futures last reached a record settlement on Aug. 22, 2011, at $1,888.70 an ounce on the Comex division of the New York Mercantile Exchange, according to the CME.
They closed at $1,770.60 on Thursday, up about 12% year to date.
Old family jewels have new value
Today cherished family heirlooms are likely to be seen as qausi-liquid assets as the price of gold rises, and new styles of jewelry come on the market. Photo: Alexandra Shriner.
Bennett doesn’t believe the runup from the $1,500 level is purely a response to the U.S. Federal Reserve’s third round of quantitative easing.
“We view the broader picture as the reason to invest in gold,” she said, emphasizing that she’s not discounting the effect QE has on gold.
“In 2013, the developed world is going to have to deal with its massive debt problems and policies that have spent the last few years devaluing local currencies,” she said. “As this happens, gold will be one of few havens available to investors looking to protect their wealth.”
Rally prospects
To many, gold’s chances for a rally, as well as a record, by the end of the year are strong.
‘Gold prices are likely to finish the year with the same strong, upward momentum that was seen during the beginning of the year — only this time, prices will rise further and surpass the Comex settlement record high of $1,888.70.’Viktoria Palushaj, CitrinGroup
“Gold prices are likely to finish the year with the same strong, upward momentum that was seen during the beginning of the year — only this time, prices will rise further and surpass the Comex settlement record high of $1,888.70,” said Viktoria Palushaj, market analyst at investment firm CitrinGroup in Birmingham, Mich.
“The anticipation and realization of a third round of quantitative easing by the Fed has predominantly contributed to the consistent rise in asset prices we have seen since August,” she said.
In general, quantitative easing tends to be negative for a country’s currency and positive for gold and other hard assets that are seen as an alternative and hedge against devaluation and inflation. See The Tell blog: What is QE3?
“The machinery of democracy ensures that the global economy will continue to be flooded with ‘new’ money — driving up the price of hard assets, particularly gold,” said Cary Pinkowski, chief executive officer of Astur Gold Corp. CA:AST +21.88%CA:AST +21.88%
Still, it looks like gold prices haven’t moved that much since the day the Fed detailed another round of large-scale bond purchases to boost the U.S. economy. Since Sept. 13, gold has spent more trading sessions rising than falling, but prices as of Thursday were still less than $2 below the $1,772.10 close on the Fed announcement day.
One kilogram gold bars are seen in this picture illustration taken at the Korea Gold Exchange in Seoul August 9, 2011.
The tight trading range for gold “suggests that we are on the verge of a sharp move and once resistance at $1,800 [an ounce] is broken, which we believe it will be, we should see sharp moves to the upside and new record highs soon after,” said Mark O’Byrne, executive director at GoldCore.
Data shows that inflows to gold exchange-traded products, which include notes and funds, reached $7.7 billion in the third quarter of this year, the best-performing quarter in just over two years, according to ETF Securities. See: Inflows to gold ETPs surge.
“Investments in exchange-traded gold funds have been increasing at a brisk pace and should continue through 2013,” said Malcolm Gissen, co-manager of the Encompass Fund ENCPX -1.49% .
Central banks have set a new record, acquiring nearly 157.5 metric tons of gold in the second quarter of this year, compared with 66.1 metric tons the same quarter last year, said Gissen, who cited data from the World Gold Council. “With countries around the world printing money and devaluing their currencies, investors are likely to continue investing in gold,” he said.
Correction on tap?
A rally in gold by the end of this year, however, is not a sure thing.
Risks to a potential rally include a change in U.S. fiscal policy via an incoming Mitt Romney administration, said Jeffrey Wright, a managing director at Global Hunter Securities.
However, “a Romney administration will not be able to reduce the growth of borrowing by the U.S. government quickly without risking a severe recession, so it will only delay the continued depreciation of the U.S. dollar and increase in price of gold,” he said.
Still, Vedant Mimani, lead portfolio manager of the Atyant Capital Global Opportunities Fund, a precious metals-focused fund based in Miami, thinks gold prices are above their fair value already.
“There is a correction coming in gold and it will be brutal,” said Mimani, who sees the “fair value” of gold at $1,100 an ounce.
Mimani thinks investors who are bidding up gold prices ascribe more power to the Federal Reserve than it actually has. “Even if the Fed were able to devalue the dollar through a series of [QE] programs, the dollar would need to be devalued by 60% to justify gold’s current price,” he said.
Since the Sept. 13 Fed QE3 announcement, the greenback has appreciated, with the ICE dollar index DXY -0.14% up about 0.7%.
There’s also a risk that the gold market has experienced a short-lived recovery known as a “’dead-cat bounce’ and we’re headed back to the mid-$1,500s,” said Mark Leibovit, chief market strategist at VRTrader.com.
If that’s the case, gold could post new lows under $1,525, he said.
Still, there is a good chance gold will hit a record by the end of the year, “if it corrects a bit first — perhaps back down to $1,700, setting up a less ‘overbought’ condition,” said Leibovit.
Myra Saefong is a MarketWatch reporter based in San Francisco.
