Judging from the performance of equity markets in China, Europe and the US, along with the bounce in oil, now up ten percent in a week, one wonders if the reflation trade is back on.

In addition to the rally those assets, broad commodity gauges are bouncing and there's an interest rate rally going on, as well.

There are, however, some important questions to be answered before we can say that the much-delayed stimulus from the European Central Bank, rate cuts in Russia, Australia and, potentially, China will lead to a 2009-style snapback the world over.

Unlike the Fed's nearly immediate response to the US financial crisis, other central bankers, whether in Europe, Japan or China, have not had uniformly stimulative policies to say the least.

And one has to wonder, in Europe's case especially, if QE is coming in too little an amount, and too late to matter.

However, markets, after a very rough January, have made an abrupt turn. The dollar has lost a little of its steam, crude has stopped falling and equity markets appear on slightly firmer footing.

Dead Cat Bounce

To be fair, two days of trading does not a trend make. Nor does a three percent correction in US stocks in the first month of the year. But counter-trend moves in markets can be short and sharp, assuaging fears about their future direction, lulling investors in a false sense of security and trapping them in, before another down leg begins.

Given the swift and steep decline in energy products, for instance, it's hard to imagine that they have simply turned on a dime, or maybe dollar when adjusting for inflation.

Crude oil prices fell more than 60% from their 2014 peak, before bottoming just above $44 a barrel. The ten percent rebound may just be a bounce in a radically oversold condition.

Sentiment toward oil has gotten as bearish as one can imagine, with Saudi Prince al Waleed claiming that we will "never see $10 oil again." The CEO of British Petroleum, after announcing a quarterly loss and a reduction in future oil investments, echoed that sentiment, saying that there is no hope of oil going to $100 anytime soon.

Given the unanimity of opinion, it was time for oil to make a counter-trend move.

So too for equities, both here and abroad, which spent the majority of January's days on the downside.

Philling the Gaps

Punxsutawney Phil saw his shadow yesterday, suggesting six more weeks of of the big chill. Not sure if he was forecasting the weather, or a continued winter of discontent in the financial markets.

The markets are filling gaps created by the plunge we saw in January and this could simply be a head fake.

Portfolio adjustments of some kind are in order here. Clearly, as stocks, oil and gold rebound, it is best not to be long bonds, or bond proxies, like bond ETFs or REITs, at least on a trading basis.

Beyond that, raising cash from those trades, or investments, offers some flexibility in assessing whether this rally is for real, if risk is back on, and reflation, rather than deflation, is the new world order.

Critical Question

The reflation versus deflation debate will be the most important market debate of the year.

If the extra stimulus from non-US countries is successful, we may very well have a new leg up in an on-going, secular bull market.

If interest rates renew their recent declines, oil heads back down and the dollar strengthens, the markets will be sending a signal that the true deflation battle has just begun.

While one hopes for the former, one must be prepared for the latter ... looking for any indicator that suggests deflation is re-gaining the lead.