4-27-06 Lag…You're IT!

Good Evening.

This morning it felt like curtains for the NASDAQ as it's brother the NDX breached the important 1700 level, retesting support around 1690. The pain and suffering came from the unexpected rate hike in China which was extrapolated to mean more of the same here in the good 'ol USofA. However, Ben Bernanke threw cold water in every Bears face when he delivered his speech in front of Congress. Simply put the Fed Chief said that a pause seems likely even if upcoming data points to mild inflationary pressures. This caught bond traders and stock market participants completely by surprise which allowed for a major reversal from key support levels.

The fact that the Fed is willing to accept some inflationary pressures speaks volumes to the fact that monetary policy acts with a "A LAGGED EFFECT" on the real economy. The economy is only now starting to feel the effects of rate hikes from 9 months ago. In other words, the most recent hikes have yet to make their mark. Traders also need to remember that Ben Bernanke is mindful of the fact that the Greenspan legacy is one of overshooting. Ben's slightly larger concern of deflation compared to his predecessor seems to make him more prone to go slower with rate hikes while collecting Economic data. This is excellent news for the financial markets and will ultimately be celebrated in a big way.

Unfortunately the pathetic Bulls were only able to muster up a 0.5% rally into the close. While we are impressed with the reversal from today's lows we are highly disappointed with the inability of the Bulls to follow through in a more meaningful way. It is becoming increasingly apparent to us that the real performance chasers and sideline money will not enter the market until we hit much higher levels that demonstrate stickiness. Perhaps once the NASDAQ breaks above 2375 and holds for a few days, the real buying interest may develop. Until then we believe that the NASDAQ will continue to climb a pathetic wall of worry back to the 2375 level over the next week or so.

If You Held a Taser to Our Head:
The much hoped for rotation out of the energy complex into technology and financial stocks seems to be underway. You might need a magnifying glass to see it…but little by little, it should morph into something wonderful! Your friendly neighborhood Kcap Team is aggressively net long and anxious to get the party started!

Hope you traded well.

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