Central bankers around the world have suddenly decided to act with force and unity. This sudden announcement was not anticipated by many, and certainly not by the markets. For this reason, the markets ripped higher on word of the Chinese rate cut and Fed, ECB, BOE, BOJ, SNB easing. One questions investors must ask themselves: What prompted such action?
Pimco's Mohamed El-Erian told Bloomberg, "central banks are seeing something in the functioning of the banking system that worries them." Jim Cramer has said, "there would have been another Lehman Brothers in the next ten days had central banks failed to act."
So the question is, what could become news in the next few days that makes us better understand why global central bankers decided to act? One possibility is that global central bankers believe that a total collapse of Europe is imminent. Perhaps Germany will leave the euro soon. Maybe Italy will default on it's debt. Maybe a massive round of bank nationalizations will hit Europe.
Whatever the reason, clearly the risk to the system were and continue to be extreme. For this reason, investors should remain skeptical and sell rallies until we see just how bad the news will be out of Europe. Some argue that the market will "climb the wall of worry", but it appears as though most traders expect the rally to continue for at least some time.
For example, on CNBC's Fast Money, almost all of the traders agreed that gains would continue. Pete Najarian, Dennis Gartman, Joe Terranova, and Mark Fisher were all bullish short term, while the only bear seemed to be Stephen Weiss. If we were truly "climbing the wall of worry," these traders would probably be more bearish than bullish.
Another reason to doubt that the stock market has hit a low, is the fact that we have not had a true "washout." We have yet to see real panic set in. In order to get a real bottom, panic is a necessary ingredient. Optimism over central bank easing means that the bottom still may lie ahead in the weeks and months to come. One way to play this theme is to go short the S&P 500 (SPY), or long Treasuries (TLT). Traders could also bet on an increase in volatility via the VXX.