I foolishly tuned the sound up on CNBC earlier this week and heard a talking head use the term ” Dead Cat Bounce .” This Wall Street metaphor likens throwing a cat out of a 50 story building and supposedly signals a brief recovery in a falling market. So-called “technicians” aka the ‘witch doctors’ of Wall Street, use this metaphor to describe a chart pattern suggesting one should avoid buying stocks during its occurrence.
I live with three cats and find this analogy, metaphor, chart pattern or whatever you want to call it, particularly offensive.
The notion that there is a similarity between a senseless act of animal cruelty and the stock market is an idea only Wall Street could embrace (for good reason).
Large investment firms and financial media outlets thrive on two things: news and money in movement.
If you’re not trading, they’re not happy.
If all investors embraced a buy and hold discipline, there would simply be no need for coined phrases encouraging you to buy or sell. But that’s not the way Wall Street works and it’s not the way the financial media works either. They need you to buy and sell in order to make money, sell advertising and stay in business.
“The Dead Cat Bounce” means now is not a good time to buy stocks because they are headed lower so you better get out now. Utter nonsense.
Many analysts and reporters are apparently unaware of the mountain of evidence proving that no one can successfully time the stock market over, and over, and over. Not now, not ever in the course of human history. OK, so your Uncle Vinnie did it once back in 1987 and he’s been bragging about it ever since but timing markets repeatedly is impossible, at least according to the evidence.
Have you ever seen a market timer on the cover of Forbes magazine?
Duh…if you didn’t buy on the Dead Cat Bounce or the Head and Shoulder Dip (that’s one for a future blog post), or at any other point in the somewhat distant past, you’re a chump.
The Moral of the story is simple; don’t listen to pundits, the media, or your Uncle Vinnie.
The only strategy that really, really works for most of us is buy and hold.
If markets rise or fall a lot, go ahead and rebalance back to your targeted risk. And if there are no big moves, rebalance once a year. It will definitely limit your risk and may even help your returns.
Coach John Wooden said “ Next to love, balance is the most important thing” and I could not agree more.
Listen to the Coach and don’t forget to turn off your TV.