Psychological Warfare. 4-3-06

Good Evening.

Monday morning optimism is always an invitation for Bears to fade the strength. This is especially true when so many were expecting a significant pullback following what seemed like last weeks end of the quarter shenanigans. When the market failed to pull back early this morning, many underinvested Bulls reached the premature conclusion that perhaps last week was a little more than artificial buying. Accordingly, the underinvested Bulls morphed into dip buyers just in time to fall pray to the waiting claws of the more patient Bears late in the afternoon. All in all, the Bears were out to hurt the Bulls and their patience prevailed.

Despite the NASDAQ's inability to follow through on last week's strength, the averages have still not suffered any substantial technical damage. There are still many who find themselves underinvested and are suffering a healthy dose of performance anxiety. It will not take much for the underinvested Bulls to reemerge should the NASDAQ pull back to the nearest support level around 2325.

The preannouncement season is upon us and that is likely to act as a counterbalance to the emotions of the dip buyers. However, should the NASDAQ find its way to consolidate within this new trading range of 2300 - 2360 the ingredients will be in place for another upside attempt before the big bad grizzly truly gets ferocious. Nothing would be healthier than a little range trading between 2300 - 2360 as we head into the heart of earnings season in the next two weeks.

Your friendly neighborhood Kcap Team still harbors concern for a sharp and sudden pullback that has the potential to morph into something more hideous. This is definitely affecting our decisions and our level of willingness to deploy cash. However, we cannot deny the fact that this market acts well despite all of the obvious signs of trouble such as higher interest rates, higher commodity prices, intermediate overbought levels and negative divergences in the internals such as contracting new highs. Therefore we have decided to maintain a balanced approach with 60% invested, skewed towards Large Cap Technology stocks. We are favoring some of the good news stories that have recently fallen out of favor and seem to be showing signs of life over the past couple of days i.e. the BRCM and MRVL duo. We also like CSCO as it continues to telegraph that a major breakout in it's share price is looming.

On the flip side our 40% cash hoard should provide ample cushion should the market pull a nasty reversal on this sweet little 'ol Kcap Team. Thus far we are outperforming all of the major averages Year-to-date and find ourselves walking a tightrope with trying to participate and not give up our out performance. We are definitely stubborn with deploying our cash and continue to wrestle with the positive market action versus our inner feelings.

If You Held a Taser To Our Head:
The NASDAQ is likely to retest the 2360 level sometime in the next two weeks. Should the Semiconductors emerge as out performers which were only apparent today, we will gain more confidence to add exposure at higher levels. It sure wouldn't hurt for the Russell 2000 to hold onto most of its impressive gains as well. Bulls and Bears are staring each other down and both sides are bluffing. No one has conviction in their views which makes for restless nights.

Hope you traded well.

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