Thursday, 12 March 2009

Dead cat bounce?

There have been some comments about my prediction that the FTSE100 will drop to 3,200 – most probably around April – followed by a dead cat bounce. Firstly, what did I mean by a dead cat bounce?

In short, and at the risk of again teaching grandmothers to suck eggs, a dead cat bounce is small and temporary recovery in a financial market following a large fall.

Typically, when a financial market suffers a consistent fall traders attempt to detect when prices are at their lowest and then buy stocks hoping for a bargain. If they buy too soon prices may rise temporarily but then decline again. This is called the dead cat bounce. The idea being that even a dead cat will bounce if you drop it from a great height.

Did Tuesday’s big rise (4.8%) in the FTSE100 represent a dead cat bounce?

Given the falls over the past 6 months, I suspect not – it might be classified as a small bounce – but personally I still expect the FTSE100 to fall further, say to 3,200 - before a real dead cat bounce back to, say, 3,800 – followed by a return towards the original low.

However, please remember that, whilst a dead cat will bounce if you drop it from a high building, it doesn't mean it's alive. I still think there is more bad news to come out of the financial sector (Barclays in particular), the extra costs of pension funds, further declines in property values and continued de-stocking.....

No comments: