Cashin: Don’t buy without understanding this

Wall Street bulls were kicking up their heels Friday, jumping for joy, as the S&P 500 neared its all-time high. The gains were particularly satisfying for bulls after a wicked selloff earlier in the month threatened to drive the market into correction territory.

Gains were broad, with 123 new 52-week highs on the S&P 500 versus just two new lows.


As exciting as the rebound may be, UBS' Art Cashin said Friday on CNBC's "Power Lunch" that before individual investors hit the buy button, there's something they should know.

"What we're seeing is a massive global short-covering," he said. "That's why stocks are rallying."

That is, Japan's central bank surprised the market with an increased stimulus package.

Overnight, the Bank of Japan voted 5-4 to accelerate purchases of Japanese government bonds while tripling its purchases of exchange-traded funds and real-estate investment trusts.

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Just as QE drove money into stocks when the Federal Reserve implemented a stimulus program, pros expect the same to happen in the wake of Japan's program.

And they're trying to get ahead if it.

"And anybody who was bearish, is now scrambling to cover," Cashin said, fearing money will flow into the stocks that they had sold short.

The concern for individual investors is that, typically, a short covering rally doesn't last. That's what Cashin wants investors to know.

However, the current rally may be an exception to the "short-covering rally" rule.

Kenny Polcari of O'Neil Securities added that if the European Central Bank were to make the same kind of surprise announcement in the days ahead, stocks could soar much higher.