Only 11,011.9 Points to Fall 1-9-05

Good Evening.

The Dow Jones broke above 11,000 and managed to close above the "magic" number on its first attempt. Many so called "professional" Hedge Funds are currently net short and looking to go long new underwear. Your friendly neighborhood Kcap Team is still somewhat net long but slowly scaling into short exposure in the Small Cap and Semiconductor arenas. We believe the market is likely to offer shallow pullbacks that will be quickly bought yet lose upward momentum each and every time. Ultimately this market currently saturated with "late buyers" will administer a proper spanking to those who dared to procrastinate with their buys. Ultimately the decline will be sharp (not 11,011.90 points) but perhaps a good 7% - 10% correction is likely.

On Friday's post we revised our expected narrow range for the NASDAQ to between 2278 and 2320. Indeed the NASDAQ hit an intraday high of 2322 before providing a little downward Cliff action. Unfortunately dip buyers stepped in around NASDAQ 2311 to save the day. The failure of the Bears to even bring the NASDAQ to the low end of the range is troublesome and does not bode well for the market once the Grizzlies get a foothold. The longer this market goes without a rest the more dangerous it becomes.

Many Bulls believe that the lack of follow through from the Bears implies superb health for this Bull. Under different circumstances we would agree however, this is a market that is showing severe cracks in the internals. The Utilities and Transports are both acting poorly and even upside volume as a percentage of total volume is starting to decrease. New highs, although expanding, have not yet reached earlier peaks. Even the total volume is slipping. It is becoming extremely difficult to find stocks that are not parabolic which is making fresh money buys a leap of faith. There are a few pockets of laggards to choose from but they are getting used up fast.

Warnings season is upon us as Alcoa (AA) demonstrated a reminder after the bell that things can go wrong. Expect a few more nasty surprises in the next several days. Whether the market can overcome these hurdles from this juncture is questionable at best. We certainly are not comfortable heading into earnings season with a market that seems to have fully priced in positive news.

If You Held a Taser to Our Head:
We recognize that it is difficult to be patient for traders that are not fully invested at this time. Hopefully most of you were more invested throughout last week and have since recently sold into strength. Traders in that position should be able to exercise greater restraint from chasing stocks higher around these levels. We do not recommend being net short at this time however; this is a time for defense not offense.

Hope you traded well.

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