Here's Why Stocks Will Shoot Higher... For Now

Put down that can of beans, unlock your bunker door and fire up your computer…

We’ve got some interesting developments percolating under the surface of the major averages you need to see.

First, the market has stopped going down—for now. It’s too early to know if the current correction has run its course. But the market looks much more forgiving today than it did just a few weeks ago.

The S&P 500 is up more than 8% since February 12. Yes, the major averages are still in the red for 2016. But this strong move off the bottom is raising investors’ eyebrows.

Will stocks go higher over the next several weeks? No one really knows.

But I’m betting this rally will last for at least a little while longer.

Why?

It all comes down to risk. Last year you saw firsthand what happens when investors shun risk and flee to big, “safe” stocks. Small-caps, biotechs and other speculative names got crushed.

It makes sense. These are the stocks you’d normally knock down a few pegs when the going gets tough. But these are also the first groups to put in a meaningful rally when the markets begin turning around.

Over the past few weeks we’ve seen just that.

The Russell 2000 small-cap index has left the major averages in the dust since the early February lows. It’s up more than 12% as I type, compared to the S&P 500’s 8% gain over the same timeframe. Take a look for yourself:

Small-capShine-DR

The market is an emotional beast. It always overshoots on the upside… and the downside. Investors panic and sell. But they also panic when they’re afraid of missing out on a big rally — and they buy!

That’s what we’re seeing right now. Hordes of investors are “panic buying” beaten-down stocks by the truckload. They didn’t believe the rally when it first materialized. And now they’re afraid of missing an even bigger move.

Right on cue, everyone got just a little too bearish. That’s where the pain sets in…

“There is a saying on Wall Street that the markets try to deliver the maximum amount of punishment for the most investors possible. They call this phenomenon the pain trade,” FMD Capital’s David Fabian explains. “In essence, the pain trade is when investors become so overly bullish about a specific theme or outcome that they overload one side of the boat. As the boat leans further to one side, the majority of participants become complacent as their thesis bears fruit. This leads to a heightened level of pain as the equilibrium shifts and the boat tips back to flat or in the opposite direction. The shifts usually happen in a very short period of time and with little warning, which makes them difficult to predict and re-position ahead of time.”

This time investors piled onto the bearish side of the boat. And when stocks turned against them, the pain trade was on—and it’s been a doozy so far.

With all of the panic buying we’re seeing in the markets today, it’s important to keep a level head and trade your plan. The herd will continue to chase overextended stocks. That’s fine. Let them chase while we focus on fresh breakouts in unloved sectors.

And don’t forget to take some gains of the table when you can! Today, we’re cashing out our 3D Systems Corp. (NYSE:DDD) trade, which you just bought on Monday morning. It’s up a whopping 17% in just a few days. That’s the kind of quick-hit you can expect when the markets are in snapback mode…

Sincerely,

Greg Guenthner
for The Daily Reckoning

P.S. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right hereStop missing out. Click here now to sign up for FREE.