Consolidation Period Needs One More Tough Day 12-19-05

Good Evening.

After a slow lethargic consolidation since the Fed meeting, the market finally injected a healthy dose of fear to participants. The last thing anyone wanted to see was emboldened Bears in the last 10 trading days of the year. However, was it actually the Bears that we saw today? We believe that today's declines were simply a function of some nervous Bulls making a last-ditch effort to protect paltry profits. Furthermore, the bids were not there to support the sales from these nervous Bulls.

Although the NASDAQ breadth has been negative for the past week and volume was decreasing on up-days, most Bulls were slowly accumulating positions, counting on performance anxiety to offer one last upside attempt for 2005. Since the Bovines have recently accumulated so many shares that they need to stand on their tiptoes in order to see over their portfolio, it should not be too surprising to find so few bids in today's action. The problem of course is that there is a high likelihood that we have not yet seen capitulatory selling from most Bulls. Once this selling phase is accomplished, the consolidation period will have truly run its course. Therefore, we would not be surprised to see one more panicky day to the downside this week.

Under the surface traders are starting to recognize a clear rotation out of Small Caps and into Large Caps. This fits in well with our longer-term Bullish theory on the Large Cap Tech Sector for 2006. Therefore, we have decided that additional exposure in our portfolio will reside in some of the following names on a further market pullback: Broadcom (BRCM), Microsoft (MSFT), Cisco (CSCO), Yahoo (YHOO), Texas Instruments (TXN), Marvel (MRVL), and Intel (INTC) to name a few. NASDAQ 2205-ish seems like a nice starting point to add this exposure. Keep in mind we are not opposed to buying higher should the internals demonstrate marked improvement.

If You Held a Taser to Our Head:
The market in all its cruelty is desperately trying to shakeout the weak Bulls who only have positive, YTD, low single digit performance. As they finally capitulate this week accompanied by newly emboldened short sellers, the stage will be set for a solid end of the year post Christmas rally. This upward Spike will most likely be derived from nervous short covering and redeployment of positions from the desperado's who sold this week. Your friendly neighborhood Kcap Team will be maintaining a very net long exposure to the market. Despite this, don't be surprised if we try a little IWM short hedge prior to the final washout that we are predicting this week. In the meantime be aware that Mr. Market can jig like no one else on the dance floor!

Hope you traded well. See you tomorrow.

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