What is a dead-cat bounce?

This phenomenon may also be referred to as a “sucker’s rally,” in that it gives investors false hope, or “catching a falling knife”—that is, buying on a dip destined to fall still lower. The key question investors have to ask themselves before buying stocks that have come down in price is whether the decline preceding the bounce was overdone—and the stock’s or index’s long-term prospects remain sound—or there is a deeper problem that could undermine its previously estimated profitability into the future.

Example: “Nortel Networks stock experienced multiple dead-cat bounces between its 2000 high of $124.50 a share and its delisting from the Toronto Stock Exchange in 2009 at the price of 18.5 cents.”

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