Bulkowski's Dead-Cat Bounce by Industry

This page shows how often dead-cat bounce event patterns occur in an industry. The fewer that occur, the better the industry is for traders and investors.

For example, suppose you are looking to invest in a new industry. Which one should you choose?

You've found an appealing stock in oilfield services and another in building materials. The below list tells you that the dead-cat bounce rate is 32.8 for oilfield services and 70.1 for building materials. Thus, the chance of owning a stock that declines over 15% in one session is 70.1/32.8 or twice as high in the building materials industry than it is in the oilfield services industry.

All else being equal, you would invest or trade a stock from the oilfield services industry because it is safer.

Methodology

I looked through 572 stocks in 47 industries from the start of data (which varies from stock to stock, but used a total of 2,359,214 daily price bars, or about 16 years of data for each stock) to 8/24/2009 (encompassing both bull and bear markets) or for shorter periods as shown in the tables above. All industries contained at least 5 stocks with the average of 12 stocks per industry. I located all days where price dropped 15% or more in one session, measured from the prior close to the next day's low. I added these drops for each stock in an industry and divided the result by the sum of the total number of days searched for stocks in the industry. I multiplied the ratio by 10,000 to slide the decimal over and give the DCB rate shown in the table.

For example, the 20 stocks in the apparel industry had 393 event declines (what I call dead-cat bounces) appear in 77,340 days of daily price data, for a DCB rate of 50.81 or 10,000 x 393/77,340.

Inverted Dead-cat bounce industry performance

Below is a list of industries sorted by their inverted dead-cat bounce rates using price data after the 2007 to 2009 bear market.

An inverted dead-cat bounce occurs when price climbs at least 5%, however the below list shows the results of stocks in which price climbs by 15%. I wanted the dead-cat bounce and inverted dead-cat bounce numbers to be comparable.

When an inverted dead-cat bounce occurs, it's a good event if you are long, so look for industries having many inverted dead-cat bounces. Unfortunately, the table also shows that those stocks having many inverted dead-cat bounces also have the bad kind: dead-cat bounces. It shows that the higher the reward, the higher the risk. The lower the reward, the lower the risk.

The results suggest that you can make money by buying a stock after it plunges at least 15% in one session. The rebound might be worth looking at. I have not specifically looked into this idea but did some related research. The possible flaw in that idea is one stock can have a dead-cat bounce but another one might see price climb by 20% (an inverted dead-cat bounce). So, you will want to check if the same stock shows a recovery.

Let's discuss the numbers. Skip down a few rows to "Electric Utility (East)," highlighted in bold. That row shows that the inverted dead-cat bounce rate was 5.4. I found one stock that had price climb by at least 15% as measured from the prior close to the next day's high, out of 1,860 price bars searched. Multiplied by 10,000, that gives a rate of 10,000 * 1/1,860 or 5.4. That places the inverted dead-cat bounce rank at 5 since the other four tie at 1, and the rate is poor. I list the dead-cat bounce rank as 1, also, since few dead-cat bounces occurred in utility stocks (which is a good thing).

At the bottom end of the table you will find industries that have higher inverted dead-cat bounce and dead-cat bounce rankings.

-- Thomas Bulkowski