Don’t Freak Out 1-6-06

Good Afternoon.

The NASDAQ broke above the 52 week high and closed over 2300. Breadth was 2:1 advancers over decliners and up volume versus down volume is 3:1. The up volume versus the down volume has clearly been the most impressive part of this rally. Once again, Semiconductors are leading as traders scramble and capitulate.

The unemployment report this morning came in mixed as the headline number showed less than expected job growth yet last month's revisions negated that weakness. Most importantly the unemployment index ticked down to 4.9% and hourly earnings were greater than expected coming in at + 0.3%. Clearly this data points to "high resource utilization" which does not bode well for the "Fed is Dead" Heads. However, the mood is bordering on panic and all news is being spun positively.

For the patient trader and investor we recommend using this strength to sell speculative names and rotate into laggards. Some of the financial stocks in the Dow still look some what attractive for a little upside, however even they do not deserve too much of our precious cash. We also strongly recommend that traders hedge themselves either through put options or index shorts for their more speculative positions.

We are not calling for an immediate destruction rather a little basing action that will likely take place over the next several days before the downside fireworks start to ignite. Admittedly, we were disappointed that the market did not pull back more following the knee-jerk pop after this morning's jobs data. The failure of the Bears to force any more profit taking from the Bulls created more panic to the upside than we were expecting. Oh and yea, we also missed a nice little ETF index trade that we were hoping for.

Since the market seems to have very anemic Bears as well as desperate (but getting spent) Bulls, we now expect a fairly tight trading range to occur between 2278 - 2320ish. We would be happy to trade ETF's within this range as long as the Bears can show a little muscle no later than mid next week. Should they fail to take the market to the low end of that range by then, the stage could be set for a very significant break down. In other words we would refrain from buying at or below NASDAQ 2280 if it occurs later than we expect. A little air out of the tires is very important and it needs to happen sooner rather then later.

We recognize the fact that should the market hover near the high of the range without releasing pressure that a break to the upside can also occur. However, our confidence is still high that such a break would be false, leading to an even nastier intermediate-term decline than we outlined on yesterday's post to NASDAQ 2150. In fact, our long-term Bull market thesis might even be in jeopardy if too large of an intermediate-term decline was to hit the market.

Your friendly neighborhood Kcap Team is approx: 55% net long with various hedges in place. We were served well by not panicking out of our positions last week and we expect to be served well by not buying into this action. Fortunately we are already outperforming all the major indexes for 2006 and are in a good position to not have to act in a desperate fashion. Honestly, you have to pity the folks who are buying here as they are very likely the same individuals who “masterfully” unwound good positions in the final 2 weeks of 2005.

If You Held a Taser to Our Head:
We expect a tight range for the market in the next few days with a large downside move as the next big money making opportunity. In any scenario the downside move will raise the hair on the back of your neck.

Please be very careful and remember it is only the beginning of January. There is plenty of time for more attractive entry points.

Have a nice weekend.

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