Why the 'pain trade' may still be higher

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Pisani's market open: 'Pain trade higher'

Despite an impressive rally, the "pain trade" is still likely higher.

My, what a difference a few days make. I left for a trip to Panama and Colombia on Feb. 24. The rally from the Feb. 11 low was still underway, but it all had a very tenuous feel to it.

But since then we have entered a new, higher phase, which you might call a "Goldilocks window."

Here's what is underpinning this Goldilocks window:

1) Economic data has been generally better than expected, and the fear of a recession has greatly receded.

2) Commodities appear to have put in a bottom; oil has rallied more than 35 percent since the Feb. 11 low, and traders have dramatically reduced short positions. This has a) positive implications for earnings, particularly for energy and materials, which have led the rally; b) positive implications for credit in general; c) eased some of the worries about financial exposure to the energy sector from banks; and d) decreased worries about an out-of-control deflationary spiral.

Other commodities have rallied as well. As China announced cuts in production capacity and layoffs in its five-year plan, iron ore is up roughly 16 percent today to its highest level since June, one of its biggest one-day rallies ever.