Shoulda…Woulda…Coulda! 2-7-06

Good Evening.

Yesterday we covered our shorts, evidently prematurely. Fortunately for us we maintained over 40% cash for such an event. The commodities, specifically Gold and Oil were hit over the head with a broom stick today although some would say it felt more like a sledge hammer. Could this be the long awaited rotation from last years winners into new leadership i.e. Commodities into Large Cap Technology? Although we believe that 2006 will be the year that completes such a transition, we do not feel that this is the time for that occurrence. A healthy dose of profit taking from an enormously extended Commodities sector is more likely the cause for today's sharp declines in commodity related stocks.

The sell off was abrupt enough to cause sincere doubts by many traders who are dazed and confused about how to strategically position their portfolio for 2006. Kcap often preaches that it is better to react to stock movements than it is to anticipate them. Therefore, we will not commit any major long exposure into this commodity related sell off until we see more stability. We will however, nibble on AAUK, NEM, PAAS, GG, GOLD, XLE, HAL, ENG, and HAWK to take advantage of the better prices. People dreamed for so long of a 10% sell off in these names and now that it has practically occurred most won't even buy 1 share!

After the bell, CSCO reported a solid quarter with generally inline guidance. The stock has been exhibiting gradual signs of improvement over the last few months, demonstrating that something interesting is abound.

There is a tremendous debate going on between Small Caps and Large Caps in 2006. We can now add Commodities into the mix. Which one of these sectors will emerge the leader is the almighty question. Ultimately we believe that Large Cap Technology will prevail but not until the debate struggles on for several more months.

We are frustrated with ourselves for prematurely covering our shorts. We will go home tonight curse ourselves in the mirror, flip the Trading Gods the "Bird", and come in bright and early tomorrow, which will be the first day of the rest of our lives!

If You Held a Taser To Our Head:
The market is still likely to produce a bounce that can take the NASDAQ to 2292. Use the weakness to slowly (and we mean slowly) build long positions in a balanced portfolio of Small Caps, Large Caps and Commodities. The confusion over leadership is likely to stay confusing and we do not recommend trying to outguess the market at this point in time. In fact, the use of ETF's in a balanced approach for more long exposure is a preferable way to play.

See you tomorrow.

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