Stock Market Yikes!! Dead Cat Bounce Or Flash Crash?

By: Andrew_Butter

The 5% drop in the US markets on Thursday was exciting, fortunately I hadn’t got around to doing anything about the decision I made in early August to jump in at SPX 1,150…Oops!!

http://www.marketoracle.co.uk/Article29855.html

Agonizing about that, shall I…shan’t I? I looked up a tongue-in-cheek analysis I put out on 30th March 2009 after Roubini’s pronouncement two weeks earlier that the rally from the low on 9th March was a “dead-cat-sucker-rally”.

http://www.marketoracle.co.uk/Article9749.html

The idea there was that perhaps there was a relationship between the likelihood of a dead cat bounce (when the market bounces from a low and then falls down a lot below the previous low), and the preceding drop.

It wasn’t a particularly exhaustive review, I just looked at the 1929 stock-market crash, but I found some sort of correlation, which basically said that you can distinguish a “dead-cat” from a live one by the size of the bounce as a function of how far the cat fell in the first place.

Sticking with DJIA, the drop from the last high on 21 July (12,724) was 15.7% (to the bottom of 10,720 (I go with closing prices)). The bounce took the index to 11,482 i.e. 7% up, which if you look at the chart is classic dead-cat territory.

Mm…regardless of my previous pronouncement on 4th August that SPX 1,150 would be the bottom, I think I’ll wait until DJIA bounces a good 10% above it’s bottom (i.e. to 11,800) before I jump back in.

Of course if I was right all along, that means I’m going to leave 10% on the table, that’s why they call me a scaredy-cat.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
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