Is this the big stock-market rally? Not so fast

The market rally is finally taking off after a dismal start to 2016. Investors seem to be buying into the notion that the risk of recession has greatly receded.

Bull and bear statues outside Frankfurt's stock exchange in Frankfurt, Germany.
Ralph Orlowski | Reuters
Bull and bear statues outside Frankfurt's stock exchange in Frankfurt, Germany.

But I'm not so sure that the big rally everyone has been waiting for is finally here.

It may just be one of the biggest short-covering rallies of all time.

What started as a small bounce in things like oil and gold trapped traders in their short positions (bets against a particular asset class). In order to get out of those "pain trades," they have been scrambling to cover those short positions, driving interest rates, stock and commodity prices sharply higher.

While I am inclined to trade with the bulls during this rally, the rebounds are quite consistent with the type of bear-market trap that fools those who are too eager to make up for lost ground.

There was plenty of technical damage done to the market in the first two months of the year. It has not been repaired fully. However, we have seen the advance/decline ratio of stocks climb (more stocks are advancing than declining), a good sign in the short run. And, a W-shaped bottom appears to be forming (a couple of dips followed by a steep climb) in all three major indexes – the Dow, S&P and Nasdaq.

The Dow's W-shaped recovery

Fundamentals have not changed all that much, save for consistent employment growth in the U.S., which has kept America chugging as an engine of global growth.

Still, China is sitting on surplus steel equal to the total combined production of the U.S., Japan and Germany. Oil is floating in tankers and sitting in rail cars as the glut continues.

Growth in the world economy is hardly accelerating. In fact, in many parts of the world, it is decelerating still.

This is a rally to trade but it may soon be a rally to fade. It may only take one piece of bad news to for the winds to shift. I'd continue buying the dips, but be prepared to bail out in New York minute if the message of the markets changes again.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.

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