End of Consolidation Period Bodes Well For Bulls 2-24-06

Good Evening

If you're getting bored with the seemingly indecisive market as of late, then as Martha says, "It's a good thing". Clearly neither the Bulls nor the Bears have been able to demonstrate conviction and take control of the market. The good news is that this consolidation period will end like all consolidation periods eventually do…with a BANG! The bad news is that being on the wrong side of the bang will be quite unpleasant. The best news is that consolidation periods which show decreasing volatility when forming a triangular shaped pattern usually break in the direction of the prevailing trend (if you have forgotten the trend, all you have to do is look at the charts of January 2006). In other words, a breakout to the upside is highly likely based on historical evidence of similar chart patterns.

In addition to the favorable chart patterns, the macro environment as well as positive seasonality also lends support to the idea of further upside in the market. Small Caps reached a new all time high and the Dow Jones has recently been hovering solidly above 11,100 (near 4 1/2 year highs). Importantly, long time concerns from market participants regarding such issues such as the Federal Reserve, competition from housing, skyrocketing energy costs, geopolitical uncertainties and a host of other ailments all seem to be abating to some degree. There is nothing the market likes more than to be NEAR the end game of a host of problems.

Mind you, the Bears have plenty of ammunition as well. The threat of terrorism, uncertainty in the new Fed Chief, fear of stagflation, an unpopular Administration that seems to be showing cracks in its unification, concerns over GDP growth and too many others to list that are causing the Bears to have numerous failed attempts on the short side. However, there just seems to be a heavier demand for stocks than in recent years and the Bears are temporarily swimming upstream.

The fact that the Bears have been unable to steal the baton from the Bulls during this consolidation phase speaks volumes. The bruising that the Bears took in January was severe. It will not be much longer for them to throw in the towel if the market continues to inch higher. Don't get us wrong, the savviest of Bears are waiting in the wings at much higher levels. We respect the damage that they can and will do to this market however, it seems like their day of victory may be postponed.

Regular readers of Kcap know that we have been expecting a decline in the market to NASDAQ 2150 by the end of the first quarter. We still believe that such a whack is inevitable but we are a little less sure of the timing. We have chosen to react to the market in the positioning of our portfolios as opposed to anticipating its demise. Therefore we find ourselves very long and will not change our posture until we see the "whites of the Bear's eyes". Simply put, there is too much positive action under the surface that keeps Kcap long.

If You Held a Taser To Our Head:
The market was able to perform well today further frustrating the Bears who almost started something with their raid in the final half hour of yesterday's trading session. The fact that the Bears could not follow through today is a very positive development for the Bulls. The consolidation range is near a tipping point and the Bulls clearly have the baton. Perhaps one more fake out to the downside which would bring out more Bearish sentiment is all that is necessary for the Bulls to take over with conviction. In any regard we are long and strong because the market's done nothing wrong.

Have a nice weekend.

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