Almost Lost Our Nerve 12-21-05

Good Evening

The market finally put in positive performance which gave some hope to the Bulls that the consolidation period is over. Clearly the frustration level has been running high while patience has been running low as traders await the Hanukkah Harry Rally. Today's action contained hopeful signs under the market surface despite the fact that there was a nasty intraday downward reversal. Absolute closing performance on the NASDAQ was solid and breadth was sweet at almost 2:1 positive. Small Caps led the market higher which is further indication that performance chasers are abound. New highs versus new lows were also fairly decent as further evidence of internal strength.

On the other hand, Semiconductors were M.I.A. as well as large cap tech stocks such as Microsoft (MSFT), Cisco (CSCO), Yahoo (YHOO), Intel (INTC), and Google (GOOG). Clearly Hedge Funds still have the second and third tear tech stocks in mind as a way to juice performance. However, our fundamental views are leading us to rotate into the Large Cap sector in order to position ourselves for 2006. The dilemma we face is that by executing this rotation we are possibly going contrary to the immediate action on the tape. It is important for us to strike a balance between building our strategic portfolio versus squeezing out a little performance in the next few days. Therefore, your friendly neighborhood Kcap Team has decided to add a little iShares Russell 2000 (IWM) into our mix in order to offset our healthy Large Cap exposure.

Keep in mind that it would not be surprising for mutual funds to bid up the Large Caps for the remainder of 2005 as the indices start to move purely on Small Cap fuel. When the big funds start trailing their benchmarks, they can only effectively participate by going after Large Caps. In other words further Small Cap strength is likely to drag up the Large Cap sector.

If You Held a Taser to Our Head:
Admittedly we were tempted today to abandon our call for the Hanukkah Harry Rally when the intraday reversal made its ugly appearance. We are cognizant of how few trading days are left in 2005 which heightens the level of nausea that we are experiencing being in this aggressive portfolio. Then all of a sudden we were reminded of the mandatory suffering and doubt that Harry would have us experience. This gave us renewed confidence that the Festival of Lights will likely still commence.

The good looking market internals didn't hurt either.

Hope you traded well.

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