The Infamous Dead-Cat Bounce

Earlier today, we appear to have seen what many pundits have referred to as the dead-cat bounce. Having never seen a dead cat bounce and suspecting that no one but the most perverse of individuals would actually test whether a dead cat would actually bounce, I am not sure how anyone could coin a reversal like todays as a dead-cat bounce.

Seven trading days ago, on February 12th, the Nasdaq and S&P closed their sessions at 1541.71 and 835.19 respectively. Through this morning, the indexes (and investors) had suffered through six straight days of declines, taking the Nasdaq and S&P 9% lower. Looking at today’s sharp recovery on measurably higher volume, one may come to a variety of conclusions on the cause.

a.) The cause may have been Ben Bernanke’s Monetary Policy Report to the Senate Banking Committee. The Fed Chief, early Tuesday morning, suggested that if policy efforts “can steady the markets, restore some measure of financial stability,” then we may see an end to the recession and a start of the recovery towards the latter half of this year. Certainly a good reason to send the oversold markets sharply higher…
b.) It may have been short sellers taking profits after 20-40% declines in some sectors, particularly financials. As the initial wave of short sellers take profits, the remaining shorts become concerned and also begin to cover, creating a squeeze of the shorts and a stampede to the exits can eventually materialize…
c.) Finally, today’s rally may simply have been optimistic bulls anticipating positive results from the “stress tests” expected to be applied by the Treasury on 19 U.S. banks starting Wednesday

Although many dismissed Bernanke as being far too optimistic and dismissive of the real cataclysmic and dire state of the economy, these are the same individuals who choose to deny that the aggressive efforts of our current administration will have any effect in slowing the current economic bloodletting. The real cause of most recessions is the pervasiveness of fear. In today’s downturn, we have the fear of losing our homes, fear of losing our jobs … and fear of losing our life savings. This has led consumers to stop all spending and investing in fear of the perfect storm hitting their lives and marginalizing their families.

But Bernanke’s suggestion is that IF policy efforts can slow the value implosion in the U.S. housing market, if it can convince businesses to see a glimmer of hope … long enough to stop terminating every employee within earshot, then possibly the most powerful force in U.S. economics, the great consumer, may begin to hope again. Hope that they may be part of the majority of Americans that remain employed, hope that although their homes may still slip further in value, that losing their homes may no longer be a risk, and hope that the equity markets can once again be part of a diversified investment strategy, despite what certain Mad and Fast shows about Money on cable TV seem to be conveying these days.

This great HOPE is what policy efforts are working for, although many on the far right see this as an overreach by the far left. Governments are there to catch the weak when they slip, provide them some respite and then allow them to continue on their own. When the weak represents the entirety of the populace, then governments must be willing to increase the size of that safety net to unheard of proportions, ignoring the calls from the masses to let “things run their course.”

I’m not sure if today’s rally represented a belief that this great HOPE may be sparked in the coming months, but to ignore and dismiss the rally simply as a dead-cat bounce, a short squeeze or an over-anxious market response to comments from the Fed Chief is naïve and short-sighted.

Stock markets often speak volumes, for those willing to pay attention to the many signals it provides. Those who allow these powerful signals to become buried under their own rhetoric, often watch in disbelief as markets move against their “seemingly unshakeable logic…” Today’s signals included:
a.) Volume that far exceeded Monday’s light volume slide to index levels not seen since 1997
b.) Closes above Friday’s close for both the Nasdaq and the S&P
c.) Potential establishment (if an uptick tomorrow holds) of a double-bottom, often an extremely strong signal for optimists

It’s only been one day, so no need to start polishing off the bandwagon yet – the skeptics will remain on the sidelines, but for those of us waiting a long time for any hint of a positive, we’ll take this day any way we can…