A ‘dead cat bounce’ can test even the most seasoned of traders. It’s all about making the right decision early and not letting greed get the better of you. This week it was the turn of Provident Financial (PFG) to demonstrate how the rebound from a very sharp drop can be extremely rewarding, but that it can just as quickly begin to unravel hence the adage that even a dead cat will bounce if it is dropped from a height.

Having fallen by a huge 75% on 22 Aug (from 1745p to 426.5p), financial markets discounting a hat-trick of bad news (profits warning, dividend withdrawal, CEO resignation) the shares rebounded by a mammoth 127% (to 971.5p) by 29 Aug. As is often the case, however, with the company’s prospects no longer what they were and city assumptions no longer valid, the shares refused to go any higher.

Since then the shares have eased by a whopping 20%, half of which this week. Not big numbers compared to the fall itself, and the rebound that ensued, but meaningful enough to penalise those late to the party, buying in anywhere near the top, greedily presuming the shares would simply keep rising.

As with all trading/investing, the bounce rewarded those brave enough to pounce when things looked their worst, echoing Baron Rothschild who said “The time to buy is when there’s blood on the streets”. He meant it literally in the aftermath of the Battle of Waterloo, but the principle holds. In the spirit of contrarian trading/investing; the worse things appear, the better the opportunitiy.

When a UK 100 (or even ) share price moves by more than 5% (up or down) our traders know about it instantly. And they will pass on the message to clients, giving them an opportunity to Buy, Sell, Sell Short or sit on their hands.

When PFG announced its bad news in an unscheduled 7am trading statement it was obvious there would be a negative reaction when trading began at 8am. A chunky 43% drop at the open – very rare for a UK Index bluechip – was thus no surprise. Our clients had had plenty of time to digest the news and put together a plan of action, assisted by our early price indications (from 7.50am the market trading order book made it clear that the shares were set for a very steep drop). This allowed them to decide which of four things to do;

1. Buy the shares immediately, assuming they had already fallen too far.
2. Immediately sell the shares short, assuming they had further to fall. This option could have offered up to 50% downside as the shares fell even further.
3. Wait for a bounce to suggest a bottom may have been reached. This offered potential for gains of up to 30% within an hour and a whopping 60-80% in just 24-36 hours.
4. Watch the shares from the side-lines and miss out on all the fun (no risk, no reward).

To be in with a chance of getting your claws into the next example of this age old feline trading adage, get access to the research now to allow us at Accendo Markets keep you abreast of similar big share price moves that could generate you big profits. PFG has been added to a 2017 list of heavy fallers and rebounders that includes AstraZeneca, WPP, Carillion and Dixons Carphone to name but a few. There is sure to be another one soon. Make sure you’re in a position to profit.

As always, have a great weekend

 Mike van Dulken, Head of Research, 8 Sept 2017