Decisions…Decisions 12-16-05

Good Afternoon.

The consolidation period continues to fray the nerves of the Bulls. There are profits to protect and nobody wants to get caught in a sudden downdraft which would erode whatever positive performance they have worked so hard for. Frankly speaking the short-term technical's of the market stink. New highs are contracting, the oscillator is rolling over and volatility is very low. The Semiconductors and the Small Caps get faded every time they lift their head up. There is no doubt in our mind that if it were not for performance anxiety (dip buyers), quadruple witching and S&P/NASDAQ rebalancing, the market would do a more fearful shakeout.

The dilemma is that the fundamentals in the economy and most corporate balance sheets are strong. In addition there are exciting catalysts starting to gain attention that will likely drive this market significantly higher in 2006. Traders are forced to try to figure out how to protect hard fought profits while simultaneously positioning their portfolio for what appears to be a continuation of the Bull into 2006. Furthermore no fund manager and we mean ABSOLUTELY NO fund manager wants to be left on the sidelines should this market Spike up and take out this year's highs in the next two weeks.

Some money managers have resorted to buying Puts which can be purchased very inexpensively due to the low volatility. This is usually an attractive way to maintain long exposure while offering short-term protection. The problem is that since Puts can be bought very inexpensively the probability of them expiring worthless is high. As is anything in life, things that can be acquired on the cheap, are usually not worthwhile.

Your friendly neighborhood Kcap Team is still holding on to a very long exposure. Our portfolios continue to buck the trend as we have made money every day during this consolidation period. This is not to brag, rather to point out that our inclination to lock in profits is even higher than most. On the other hand, can you imagine how our portfolios would scream to the upside should this market kick into gear! Hmmm…. now you see the decisions that confront us.

No serious intermediate technical damage has been done to the market yet. We are still willing to allow another few days for the consolidation period to play out. However, our stress levels are causing frequent trips to the bathroom!

Hope you're doing well!

This will be our final post until Monday. Have a great weekend.

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