Musical Chairs

Small Caps finally showed evidence of tiring today but the Semi's were more than able to steal the baton. With both solid breadth and volume the market laid out a challenge to the underinvested Bulls and Bears alike. Now that the NASDAQ has once again breached 2300 and closed above that almighty level the game becomes very interesting. Performance anxiety will pressure stocks upward while the smartest of Hedge Funds will slowly start positioning themselves for the "nasty" pullback. Poor market internals combined with temporarily deteriorating fundamentals in Corporate America will eventually come home to roost and provide a hair raising decline, most likely before the end of the first quarter (target NASDAQ 2150).

Market participants are relieved that the most recent lack luster earnings period is winding down. However, anticipation of a difficult warnings season prior to the April reporting period will now be a cloud over the market keeping substantial upside in check. Therefore, expect significant volatility over the next few weeks as performance chasers battle the Fundi types (who are looking for the beginning of a deep correction). In the very near term, next week will be filled with catalysts that are sure to provide stimulation. The FOMC meeting on Tuesday combined with the Presidents State of the Union Address, a host of economic data as well as Small Cap earnings reports are just some of the fun things in store.

Our dilemma is that we believe the easy upside trade has been made. From this point forward the risk of getting caught in a sudden and dramatic downward Cliff is substantial. For the first time in a while the Bears temporarily have weak fundamentals and poor technicals on their side. This is a potent combination, more than enough to fend off the performance anxiety that has just reemerged and is fuelling the Bulls. As the market chops around these levels, performance anxiety should slowly abate allowing the Bears to stealthily increase the overall risk for the longs.

Will Bulls celebrate the farewell party for Greenspan on Tuesday despite one more rate hike? Will the most recent Bullish economic reports in 2006 (versus the old news GDP data delivered today) force Bernanke to be more hawkish? Do traders even know what to wish for; strong economy or softening? Will an outside event such as terrorism come at a critical time for the Economy and the stock market (Admittedly we are more concerned than most other hedge fund managers we speak with regarding terrorism....all of whom are dismissing Bin Laden too quickly). Our takeaway from Bin Laden's message is for the U.S.A to not underestimate his capabilities just because we haven't truly felt them since 9/11/01...VERY ALARMING! These are some of the questions and concerns that we will be wrestling with over the coming weeks.

Despite these concerns and the NASDAQ hitting our 2300 target we have decided to temporarily stay the course, fully invested. Indeed, we are very uncomfortable and are slightly tempting fate however, that is precisely the reason why we choose to stay fully invested at this time. We recognize the power of the "Wall of Worry"!

Due to our significant out performance thus far in 2006 we are adopting a reactionary approach to the market. We know the music will suddenly stop as everyone scrambles for the last chair. Despite this, we have made a bold decision to stay long because we think the upside potential will be greater than the giveback when the music stops. We are prepared to unload when the market gives up 1-2% on a closing basis. In other words, we have grown a pair of brass balls.

If You Held a Taser to Our Head:
Next minor resistance for the NASDAQ is 2314. Next major resistance 2330. Quite frankly the only thing that we can anticipate at this juncture being Bears in Bull clothing is a lot of Pepto Bismol.

Have a good weekend. See you on Monday.

___________________________________________________
The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
___________________________

Click Here To E-mail Comments