Dead Cat Bounce
SEATTLE - 29 December 2001

Dead Cat Bounce
The economic spin machine was in full force on Friday with the release of better than expected consumer confidence numbers. The numbers made front-page news in our local paper, The Seattle Times, with a headline declaring "Economic Signals Improving." In addition to consumer confidence, the story reported that new home sales rose by 6.4%, and durable goods orders excluding defense rose 2.7%. But the euphoria in the press is premature and misguided, in the opinion of D2.

Tellingly, the stock markets' response to the good news was muted, with all major averages advancing less than half of one percent. This is not unexpected, as the markets have had healthy rallies since the late September lows. The Dow is up over 20%, and the NASDAQ up over 40%, leading one talking head on CNBC to proclaim that we are therefore "in a new bull market." Presumably, if this is a new bull market, the time to buy is now. The corporate controlled spin machine never rests. Not only is such talk ridiculous, it is irresponsible to foist such misguided ideas on the (admittedly ignorant) investing public.

As Richard Russell points out in his recent Dow Theory Letters report, from 1929-1932, during the greatest bear market in U.S. history, there were 6 upside corrections, five of which were over 20% in extent. Were they "new bull markets?" Hardly. All were merely a dead cat bounce.

The dead cat bounce is an old Wall Street term referring to the snapback rally after a steep decline. It is an intermediate weigh station, when the bad news abates (or is ignored) and fleeting optimism returns just as the decline resumes in earnest. The term comes from the idea that even a dead cat will bounce, if you drop it from a high enough place.

Russell also points out that in the NASDAQ's bear market of 2000-2001, there were 6 major rallies of 19%, 35%, 16%, 24%, 41% and the current advance of 40%. All proved to be merely regrouping points for the bear before the selling began again. The jury is, of course, still out on the current rally. But chances are it is just another dead cat bounce.

Today's New York Times notes that while new home sales rose, their median sale price fell, breaking through support at $160,000. And existing home sales were up only a trifle. Also of note was reports of the deteriorating international condition: Japan's banks are suffering under $1 trillion of bad debt, French unemployment has risen to 9%, Deutsche Bank is cutting 2,100 jobs, Oracle is axing more as well. The real news is not getting any better, it's only that our focus has shifted for the time being.

Just as markets don't go straight up in a bull market, neither do they go straight down in a bear market. There are pockets and periods like these when we ignore what is truly going on, and optimism returns. Take note. This is what a dead cat bounce looks like.
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