The Dead Cat Bounce By: Gabriel PotterMBA, AIFA® 2015.02.11

Quoting Investopedia: 

“A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce is a small, short-lived recovery in the price of a declining security.”

Finance and investing can be an awfully dry subjects.  I guess that’s why we’ve got some great, colorful definitions to liven up the discussion.  The reason we’re enjoying this fun definition regards oil.  It’s been a little dangerous to make comments in our blog posts or monthly articles about the price of oil because it changes so rapidly.  As a reminder, the price of oil fell off a cliff starting in July 2014, from $110 per barrel to about $45 at the end of January.  We discussed the reasons for the price drop in our monthly article, “The Energy Sector”. 

Since January, the price has bounced back up to about $52 per barrel.  Is this a dead cat bounce?  There is evidence to suggest it is.  The price bottom at the end of the month and subsequent sharp recovery implies short market traders had to cover their short positions, some on a monthly timetable.  Furthermore, Citi’s global head of commodity research, Edward Morse, recently argued oil prices could fall all the way to $20 per barrel since oil production is still rising and storage inventories are nearly at capacity.

On the other hand, Citi isn’t calling for a sustained price of $20 per barrel.  Recall that hydro-fracking wells are profitable in the US given prices ranging from $40 to $80 per barrel.  Several oil wells have already gone offline and exploration will suffer from the lack of profit incentives given the supply glut.  Again, it will take a little lead time for drillers to get back into the market, so Citi actually calls for a late year price spike before oil settles to a nearly stable $54 per barrel target. 

So, is the recent price recovery in oil a dead cat bounce?  It depends on your time frame.  In the short term, it could very well be.  In the medium term, probably not.    

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

More about Gabriel Potter
Sign up for our Newsletter
Sign up for our Newsletter