New Bull Market or Dead Cat Bounce?

Posted by Eric Solis on January 28, 2010 under Stock Market | Read the First Comment

A dead cat bounce is a market that retraces half of its decline before retesting lows.  When a market falls at the speed and the magnitude that this market fell, the resulting dead cat bounce can and in fact does look like a renewed bull market.  But the fact is that a lot of Dow points to the upside does not change this probable reality of a continued bear market. 

Simple math: If a market has rallied 3500 points or 50% off the bottom relative to a 7000 Dow coming off of a high of 14000, one needs to keep in mind that 3500 points relative to the actual starting point of 14000 is only 25%.  So the markets 50%  rise off the bottom is a perfect retracement to fill the gap and is a dead cat bounce.  The “rally” we have experienced over the past year and a half has been a technical correction based on the traders understanding of charting and back filling gaps.

The FUNDEMANTALS (ex government spending) of the economy have not improved and the market is way over extended based on real economic activity which has actually deteriorated further. The way to protect investment capital going forward into 2010-2013 is to substantially reduce your exposure to equities.