Dead Cat Bounces can arise as a result of various factors affecting market dynamics. Understanding the causes is important for investors to avoid the pitfalls that may arise from this phenomenon.

The following are some of the factors that can lead to a Dead Cat Bounce that are worth knowing. Dead Cat Bounce occurs as a result of several factors interacting in the market, including many investors who tend to react to price drops. Then, speculative buying without in-depth analysis and insubstantial news or rumors that can trigger emotional reactions from investors.

The role of investors who incorrectly predict market bottoms
Many investors try to determine when stock prices bottom out before they start rising again. When they believe that the price has bottomed out, they start making purchases that push the stock price up temporarily. However, if their predictions are wrong then the rise is only temporary and is followed by further declines creating the illusion that a recovery has occurred when in fact the downward trend is still continuing.

Unsustainable buying activity by investors
The price increase seen in a Dead Cat Bounce is often driven by unsustainable speculative buying. Investors may be interested in buying stocks at seemingly cheap prices after a sharp decline. However, if this buying is not supported by improving company fundamentals or broader market sentiment then the price increase will quickly recede resulting in a deeper decline afterwards.