Too Many Bears Will Contain this Drop 2-28-06

Good Evening.

For the last couple of weeks the market has been inching up in a rather stealthily manner. The level of skepticism and hard evidence against the Bulls has been notable. However, many Bears have sat on the sidelines watching the market slowly get away from them yet again. In addition, even the Bulls have found themselves underinvested in the latest NASDAQ move between 2240 – 2312. As the market slowly scaled the “wall of worry”, traders were forced to add long side exposure or fear significant underperformance. Reluctantly they nibbled and have just started to add meaningful exposure in the past couple of days. Therefore it should be surprising to nobody that at the first sign of trouble everyone would bail. Google’s (GOOG) unpleasant surprise was the perfect excuse to sell everything and anything that wasn’t nailed down.

Today’s action is a good indication of the pervasive Bearishness that exists in this market. In a truly Bullish environment the dip buyers would have pounced on their favorite names intraday after the GOOG led meltdown. The fact that this first decline did not produce any meaningful dip buying gives us comfort that the Bearish sentiment is plentiful.

High Bearishness translates into more sideline cash that can be used for better buying opportunities. Therefore we do not expect the market to engage in an out of control freefall at this juncture. Rather, a small two to three day pullback is likely perhaps sending the NASDAQ to the 2255 - 2265ish level. Should that happen this week, and Semiconductors continue to show relative out performance, sideline cash will start to get more interested in stocks. We are hoping that the Bears start to press their temporary advantage so they can provide good fuel when they are forced to cover their shorts late this week or early next week.

If You Held a Taser to Our Head:
All in all, Kcap lightened exposure between NASDAQ 2300 and 2312 however, we still are very long. Our intention is to use any strength tomorrow morning to further reduce some of our positions specifically in the Small Cap arena. We intend on reducing our exposure to approximately 75% net long by 4pm tomorrow. Should the market pullback to the NASDAQ 2255 – 2265 level we will buy back all of our exposure and hold it for another retest of the recent highs (NASDAQ 2312). We will most likely begin our buying at (NASDAQ 2270ish). The Big Bad Bearish decline is still out there but what we are seeing today and what we expect in the near term only qualifies as a little cub that can be faded.

Hope you traded well. We will be back again on Thursday.

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