Beware of the "dead cat bounce" if you invest in a stock market

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Do not be scared with the headline. We have not gone crazy (at the moment) nor are we macabre. The “bounce of the dead cat” is a metaphor, quite unpleasant, it must be recognized, which is often used in to explain a concrete behavior .

Get in the situation

Imagine that you take a dead cat and throw it from the window of a building from a certain height. What do you think will happen? In theory, it will fall to the ground and start bouncing again and again until finally it stays still. I promise we have not checked, but the theory says it will happen exactly like that.

And what does this have to do with the stock market? You are about to discover that much more than you imagine.

The bounce of the dead cat in a bag

“The bounce of the dead cat” is an expression that is often used in the financial world to refer to companies that are bankrupt and that are worth almost nothing , but its value begins to rise.

And it is that some companies with problems , after suffering a very important fall in the stock market, suddenly, and in most cases without justification, begin to rise . The difference is that these increases do not hold up, even in the short term, and in a short time they fall again.

Many investors, after looking at their crystal ball with which to predict the future, can conclude that the fall in the price of the “they can not fall anymore” .

In anticipation of a future revaluation, their optimism leads them to buy very cheap stocks to make money selling them more expensive when the company hits a rebound and begins to rise.

The problem is that this sometimes does not happen.

Remember our cat. When you throw it from the top of the building, it is already dead. Touching ground for the first time is not what kills you. And when it bounces against him and is back in the air, despite the apparent jump, it is still an inert being. We insist: the cat is dead since they throw it out the window .

The same goes for the bankrupt company .

Although its rebounds on the stock market may suggest that its activity has normalized and begins to recover, the truth is that it is still a company without a future. The theoretical value of their shares is 0 dollars and investing in it is a terrible idea .

If you consult the contribution history of companies that have gone bankrupt, for example, Bankia, you will find the fall / rebound / fall pattern. The “bounce of the dead cat” is a behavior that happens a lot in the .

In practice, foreseeing it is impossible . Even know in advance if the rise you have before your eyes is or not a “dead cat bounce”, it is impossible too.

Therefore, do not plan the possibility of looking for dead cats to speculate in the short term and with your investments, since in all likelihood you will achieve the opposite.

If you want to make money investing in the stock market, go for it: long-term investments in investment funds, for example, in ; or investment in . It is not so fun but you can sleep peacefully at night.


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