We Are Excited For 2006 12-30-05

Good Evening.

The market needed to deposit some of the remaining Santa believers into the gutter throughout the day. Traders that owned the speculative garbage in hopes of a little window dressing had no choice but to hit every rally attempt. Even in the final 10 minutes of trading a decent attempt by the Bulls was thwarted from the "I need to sell" crowd. However, we were encouraged to see that during the Bullish attempt breadth improved noticeably.

Thankfully 2005 (which was not a sweet year for most) has come to an end. The final two weeks of the year were disappointing as the seasonal patterns were M.I.A. Clearly we were surprised by this final pathetic action but thankfully were able to maintain our account levels not too far from their highest points of the year.

Now that the December games are over we can get back to business for 2006. Regular readers know that your friendly neighborhood Kcap Team has a long-term Bullish outlook specifically for Large Cap Technology. We developed this view when it was not in vogue and are slightly concerned that the consensus has finally caught up to our opinions. Therefore we would expect a little intermediate term correction after the market relieves its oversold condition next week. We are currently maintaining a very net long exposure and will be looking to sell into strength throughout next week.

The year 2005 was pathetic in the fact that the market spent most of its time flat to down. Very little opportunity was given to lock in meaningful positive performance for most managers. However, what many fail to recognize is that 2005 is the year that woke up the masses to the allure of the stock market. The rotation game out of Real Estate, Energy, and the Bond Market has commenced this year and seems unstoppable. There is no force greater than "flow of funds" into the stock market from other large sectors that are forming tops. Granted, there are many who still believe that the aforementioned three sectors are still attractive. We firmly believe that 2006 will be the year that puts the nail in the coffin to these beliefs.

With housing inventory levels continuing to break multi year records and the inverted yield curve in the bond market likely to steepen due to the Bernanke Fed, as well as heavy Oil Supplies drawing more attention, the stock market (particularly in the NASDAQ) will look like a pretty nice alternative. Therefore due to these macro considerations in conjunction with healthy corporate balance sheets and robust product pipelines, the ingredients are in place for a significantly better year in 2006 that the market just experienced.

If You Held a Taser to Our Head:
Don't get us wrong, it will certainly not be an easy ride. The still low volatility (VIX) will create many intraday and short-term Spikes that frustrate trend traders, making it difficult to stay the course. Despite conventional wisdom, higher volatility (VIX) over longer stretches of time provides easier opportunity to prosper. Better upside performance in 2006 combined with downside action will be the feature that helps increase overall VIX levels from their low 2005 range.

All-in-all there is much to be excited about for the coming year. Perhaps we are most excited about Mr. Market finally finding his way into the hearts and wallets of Main St.

We wish you all a Happy New Year and a Successful 2006!

-The Kcap Team

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