Expect the Unexpected 3-31-06

Good Evening.

The quarter has come to a close and the NASDAQ finished near it's highs. Window dressing may or may not have contributed to the most recent resilience of the NASDAQ but we will have to wait and see in order to judge the artificial nature of this strength. Large Caps continued to underperform Small Caps however we believe that the tide will turn soon. When Semiconductors decide to resume their traditional leadership role, the Large Caps will have gained back their best friend.

Higher interest rates are certainly a major concern and more so for Small Caps. Large Caps are able to tap the capital markets through secondary offerings while Small Caps are more a prisoner of interest rate risk. This is another arrow in the quiver of our bias towards the Large Cap arena.

Sentiment is still Bearish among participants despite the market hovering at its lofty levels. This bodes well for a continuation of the up move as the wall of worry builds. Your friendly neighborhood Kcap Team has added back some much needed exposure into good news names that were recently sold off.

Apparently many traders gravitated towards the low quality Tech stocks which led the market to its most recent levels. As the quarter came to a close window dressing and markups favored these low quality stocks at the expense of some of the larger well known companies. This trend should also reverse now that the quarter is completed.

We have added exposure in the following names: CSCO, BRCM, MRVL, GLW, FFIV, YHOO, QCOM, AAPL, QQQQ and PSI. We are still carrying significant cash and are concerned about a sudden decline in the NASDAQ. However, we felt it was prudent to not be as contrarian as our portfolio was showing lately. Everyone expects the market to get hit next week and that is why the opposite may happen. Despite our net long exposure, we were a little too Bearish and have decided to SLIGHTLY adjust our posture.

Hope you traded well.

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