AHHH!! 1-3-06

Good Evening.

The market shot up on the first day of 2006 with a BANG! All of that pent up and suppressed energy from the failed Santa Claus rally let loose in one euphoric burst! The market needed to do this…BADLY…and the dovish Fed minutes provided the catalyst. The NASDAQ had its best one day gain in quite some time (pity this could not have been done for Performance Fee season, but as we know the market is cruel). Volume was heavy at 2 billion shares on the NASDAQ while breadth morphed from 2:1 negative to 19:12 positive and advancing volume vs. declining volume was better than 3:1.

The NASDAQ 100 (NDX) bounced off of the 1630-1635 support that many Hedge Funds were eyeing. The weaker than expected ISM and Construction Spending numbers helped create the final shakeout. Once the momentum kicked in, resistance levels were no match for the pent up Bulls. The key now is to decide whether or not this is a one day wonder or something with legs. Your friendly neighborhood Kcap Team maintained a very net long position going into 2006 and fortunately so.

Our plan that we outlined on Friday's post mentioned that we would be looking for an oversold bounce in the first part of the New Year. We believe the oversold bounce which commenced today has not yet been fully played out. Therefore we will start scaling out of positions on the next serious show of strength from the Bulls, most likely over the next two days.

We are very cognizant of the fact that most money managers were not as aggressively invested as we were to start the year. Therefore, we will give them time to reposition and get all lathered up before we offer them our inventory.

If You Held a Taser to Our Head:
We continue to believe that an intermediate-term decline is a few days away. The internals of the market have deteriorated in numerous ways that lead us to this conclusion. Therefore, the oversold bounce will be sufficiently strong enough to lure back most traders in order to provide a very cruel whipsaw perhaps starting late this week or early next week.

Hope you're enjoying a smoke like we are.

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