Here's how one expert thinks the war over zero-fee online trading could propel US stocks 26% higher next year - and his best trades for taking advantage

• Julian Emanuel of BTIG says another huge year for stocks could be coming as zero-fee online trading encourages investors to move money out of cash and bonds and into equities.
• Emanuel's forecast also hinges on a drop in bond prices, as he's called the bond market "the greatest bubble ever."
• Like many experts, Emanuel thinks market volatility will rise again as the 2020 elections approach, and he's telling investors how they can position themselves for that S&P 500 scenario.
• Click here more for more BI Prime stories.

A slew of big brokerages have wiped out commissions on online trading of US stocks and exchange-traded funds - and they may have cleared the way for giant gains for stocks next year.

Julian Emanuel, chief equity and derivatives strategist at BTIG, thinks the S&P 500 could surge to 3,950 by the end of 2020. That would mark a 26% rally from current levels, on top of the 25% gains seen so far in 2019.

Emanuel names a two major catalysts that could send stocks to those heights: A growing public appetite for stocks brought on by zero-fee trading, and a drop in bond prices and a rise in yields, bursting what Emanuel has called a huge bond-market bubble.

Add those to two events many experts are predicting - steadier growth in corporate profits, and an increase in volatility as the US presidential election approaches - and you have a recipe for another big rally.

"All great Bull markets (and love it or hate it, this is a great Bull market) have a point, usually near the end of the run, where the public investor "falls in love" with the asset, frequently resulting in a parabolic move higher (and often subsequently, lower) over the course of weeks or months," Emanuel wrote in a recent client note.

The saying on Wall Street is that bull markets die in euphoria. While Emanuel isn't predicting euphoria and the end of the nearly 11-year bull market, he says there are signs that the love affair with stocks has already started. He cites money that's started flowing into stock ETFs over the last three months, as well as the wave of publicity and attention as the fee wars have climaxed.

He argues that that will get investors off the sidelines and into the market. Meanwhile, he says the governments of Germany and Japan will move to stimulate their economies, pushing their interest rates above zero. Unlike a lot of other forecasters, he also thinks US yields will rise, with the 10-year Treasury yield topping 2%.

"A move above 2% could also cause a sharp surprise as investors ponder the idea of losses to bond holdings in 2020 with the back drop of uninspiring yet steady economic growth - in aggregate, a good environment for owning stocks," he said.

It's worth noting that the surge to 3,950 is not Emanuel's base case, as his official forecast is for the index to rise 10% to 3,450 at the end of the year. But he says the higher projection is a definite possibility, and at 3,950, the price multiple of the S&P 500 would be a bit lower than it was in 1999.

What investors should do

Emanuel offers the following recommendation for traders who find that S&P 3,950 target feasible.

"Investors looking to position for further market upside should consider going long the Dec 2020 3,375 Call/2,700 Put Risk Reversal (buy Call, sell Put)," he said.

He also advises investors to target some of the least-loved stocks in the Russell 2000 index, which could have a lot of room to rally. Specifically, he says they should buy stocks whose performance is in the index's bottom quintile this year, with short interest equal to at least 30% of their float, market caps of more than $500 million, and stock prices of more than $5 a share.

The worst-performing stocks that fit that description today include arts and crafts company Michaels, USA Today publisher Gannett, fuel cell maker Bloom Energy, video game retailer GameStop, and cancer drug maker Clovis Oncology.

More broadly, Emanuel holds overweights on the energy, banking, and healthcare sectors. Investors can gain exposure to those respective sectors through the ETFs like the iShares US Energy ETF, the SPDR S&P Bank ETF, and the Vanguard Health Care ETF.