MHP Asset

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Dead Cat Bounce

January 15, 2008

Mark on the markets

Dead cat bounce and falling knives

Often times when I write this article I will use terminology that may sound unusual to many people, however it is just terminology used by many traders of securities, commodities or futures contracts. Allow me to explain some of the terms that you may read or hear in the media.
Bear market: a market going down in price.
Bull market: a market going up in price.
Falling knife: a term used when a stock or derivative is falling rapidly in price. Trying to catch one (or find a bottom), often results in getting hurt.
Dead cat bounce: A temporary recovery from the fall of a stock, and then continued decline. Even a dead cat will bounce if dropped from a high enough level.
Capitulation; in military terms it means surrender, but in securities it means a sharp decline, where at the bottom, good values are found.
Reversal: A sudden change in direction of a security, index, derivative or commodity.
Bloodletting: a period of severe investment losses.
Flight to quality: a move away from riskier investments to more conservative, safer investments.
Hedge: Making an investment to reduce the risk of adverse price movements in an asset. Typically derivatives such as options or futures are used to hedge positions.
Futures contract; an agreement to buy or sell a particular commodity or financial instrument at a pre-determined price in the future.

Much of this terminology was invented during high stress times on the trading floor or in the “bullpen” of brokerage houses. A bullpen is an open area in brokerage house where many newer brokers would try to build their business in an attempt to work their way up to a private office usually on the perimeter of the building.
The business has changed dramatically in the last 15 years; brokers now want to be called financial advisors or planners. They do not want to buy or sell stocks or bonds, they want to sell you mutual funds, variable annuities or place you with third party money managers. Knowledge of the markets does not matter as much as the financial advisors selling skills.
I miss the good ole days when being referred to as a “stock broker” was something to be proud of. I cut my teeth in this business as a broker, and it was a great learning experience for me and many others who started in this business, in the bullpen, creating obscure terminology about the markets, with one of the big brokerage houses, AKA wire houses.

Mark Patterson is a registered investment advisor with MHP Asset management LLC, and can be reached at 447-1978 or Mark@MHP-Asset.com