Until we get a new round of earnings reports, the New Year is going to trade exclusively off economic reports and whatever the jiminy the financial media decides to entertain us with.

That's why we believe last Friday's jobs report is so important – despite the muted response it got from markets.

200,000 new jobs were created last month (on expectations of 150,000) after accounting for losses from the government sector. And while many claim that 40,000 or more of these jobs were related to the Ghostly Santa phenomenon – UPS and other couriers hiring seasonal delivery staff – we say bollocks and jam to the naysayers.

Remember: just a few months ago everyone was screaming about zero jobs growth and the end of the U.S. as we know it. Double dip recession, massive bank closures and a run on the dollar were on everyone's lips. And now we have the private sector creating in one month anywhere between 150,000 and 200,000 new, real permanent jobs and everyone is looking to downplay it.

We're not.

Look at this:

Of all the recessions since WWII, our latest (in red) is the worst, hands down. And at the current rate of growth, it'll be years before we reach pre-recession employment levels. Yet for all that, we've been around markets long enough to know that it doesn't make a whit of difference. THE MARKET WILL MOVE HIGHER AS LONG AS THERE'S 1) GROWTH, AND 2) ROOM FOR MULTIPLE EXPANSION.

Growth we have. The jobs numbers are the sine qua non of an economic expansion.

As for multiples, you be the judge.

According to the href="http://links.icoakshire.mkt4290.com/ctt?kn=11&ms=MjczMTYzMgS2&r=NTYxNzM0MDc4NQS2&b=0&j=MzY3Mzc4NzkS1&mt=1&rt=0">risen. CBOE Put/Call ratios and the Options Buyers Sentiment Gauge (below) are also more bullish but are still in neutral territory at present (see chart, below), indicating we still have a ways to go before we’re overbought.

Take a peek:

What's that leave us with?

• Accelerating job growth,
• Improving investor sentiment levels,
• Better manufacturing readings,
• Rising auto sales,
• Surging consumer confidence, and
• Smiles (finally) from the housing sector,

the last four of which we’ve been discussing for the last couple of months.

We are entering what we have emphasized in past months to be an unprecedented buying opportunity in equities. We fully believe that all the QE money currently in the system, all the sidelined fund money and all the profit reserves stored away in corporate America’s savings accounts are about to be unleashed on the markets.

Look for very quick, outsized gains in the first quarter, with a standard round of profit taking coming sometime in March or April.

How big could the move be? Who knows? But we say the following chart offers an indication of the potential size of the rise after three quarters of investment malaise. It's a chart from the American Association of Railroads, showing monthly year-over-year gains in rail car volumes.

See for yourself:

As the insert says, volumes are up 7.3% from last December and 18.6% from December, 2009. If it can be sustained, we say 7.3% is the minimum you'll see from equity indexes by April.

If all else fails,

Yet a look at some of the charts provided in last Thursday's article show that we may see the financials outperform most of the market in the event of a surge in the indexes.

Focus on the Leaders

It's the regional banks that have outperformed their oversized brothers in the last while. Take a look at the SPDR S&P Regional Banking ETF (NYSE:KRE) for the last year:

The stock is exactly flat on the year, compared to a nominal rise on the S&P of less than 1% and a loss on the large cap financials of nearly 20%.

But the technical picture is what excites.

• The stock has ascended above all its major moving averages, all of whom (but one) are trending higher (red box).
• Price action is well above a three month bullish trendline (in red, at top).
• RSI and MACD are both above their waterlines, and both turned higher before the banks themselves, a solid indication of a change in trend.
• The Regionals now sit less than 10% off eighteen month highs.
  

The Trade

We're leaning on the foregoing to write a bullish credit PUT spread on KRE, and buy a CALL with the proceeds.

The spread is set directly above support at the major moving averages. And the CALL is currently 5.7% out-of-the-money.

Wall Street Elite recommends selling the KRE February 24 PUTS for $0.57 and buying the February 21 PUTS for $0.15 for a net credit of $0.42. Use the cash to buy the February 27 CALLS for the roughly same price.

With kind regards,

Hugh L. O'Haynew, Analyst, Oakshire Financial