The dead cat bounce is a reference to a short period of recovery for a given security. While there may be a temporary and modest rise in stock price for the security, the momentum quickly ceases and the price either levels out or begins to drop again. Generally the degree of increase in the price of a stock is limited, and may involve a stock that was not considered favorable in the first place.

While the short period of increase followed by the decline of a stock is the essential nature of a dead cat bounce, the term is not applied to all stocks that follow this pattern. Generally, the term is only used with securities that are considered to be of low value under the best of circumstances. When a low valued stock enjoys a brief upswing in value for a short period of time and then returns to the previous and unspectacular price level that is the norm, the bounce is considered nothing more than an aberration and thus not of any real interest to serious investors.

While the name for the phenomenon is considered by many to be somewhat gruesome, the movement of a low valued stock is somewhat similar to that of dropping a dead cat off the roof of a building. When this is done, the carcass of the cat will hit the ground and bounce slightly before dropping back to the pavement and remaining completely still. This is not unlike the low valued security that experiences a short period of increase and then settles back into the lower price per unit that has historically held in place.

Securities that are prone to a dead cat bounce share a few common characteristics. First, the securities are not held in high esteem, based on past performance. Second, there are no indicators that the securities in question are capable of attaining and sustaining a higher value in the current market. Last, there are no indicators that sustained growth would be achieved if some major economic shift occurred in the market. Essentially, the securities demonstrate no potential for rising in value and maintaining that higher price per unit.

In general, there is very little money to be made from a dead cat bounce. In order to achieve the maximum return on such a movement, the investor would need to buy just before the bounce commenced and sell off the shares just before the decline begins to take place. Since a dead cat bounce may occur in as little as two consecutive trading days, the effort is rarely worth the return that is realized.