Downside Has it's Upside. 5-11-06

Good Evening.

If you think today was a bad day, then we have some bad news for you…this sell off has not run its course. Under the surface many high quality names were down far greater than their respective index. This is a sign that institutions are giving up and are panic selling their positions wholesale. These events usually last a couple of weeks and destroy many hedge funds in their wake. The fundamentals have not changed just the psychology. Even the new vanguard, Dow Jones, took a nasty hit in this ugly market sell off.

Many traders will say that the energy complex is having an upside blow off which is directly correlated to the downside give up in technology stocks. That may or may not be true but the fact is; traders want out of technology stocks and we need to give them plenty of room. In other words although it's a little late to be selling it is still too early to be buying. In fact the new mantra will likely be "sell every rally". The NDX will most likely need to work its way down to 1635 and the NASDAQ to 2230 before the real dip buyers find the courage to step in. A couple of false rallies in between may be just enough to suck in premature Bulls which will likely lead to more despair.

Other things to watch for as an indication that it may be time to buy into your favorite names will be another jump in the VIX as well as the put to call ratio. We also need to see more evidence of slowing in the economy from a series of reports as opposed to one or two. Furthermore, when we are close to the bottom of this correction good news stocks will start to levitate as opposed to fade throughout the day and bad news stocks will refuse to go down. Eventually the shorts will over press and the above scenarios will unfold providing market participants with a great money making opportunity in technology stocks. Believe it or not, we still expect this to take place over the next several weeks.

Your friendly neighborhood Kcap Team used yesterday's decline to lighten our exposure however we were still way to long for today's rout. Although we took a nasty hit today we are still maintaining heavy exposure in high quality technology names i.e. QCOM, AAPL, GOOG, YHOO, PSI and a few Networking stocks. We also have exposure in the recently loved Dow cyclical stocks such as CAT, TEX, DE, and IR. We put on a large QQQQ short to hedge out much of our technology exposure while this correction plays out.

If You Held a Taser to Our Head:
The important thing about this week's panic sell off is that better prices are now available in key high quality technology stocks. Ironically, these more attractive prices in conjunction with the shaking out of weaker hands may actually attract money flows back into the group which was starting to migrate to the Dow cyclicals. As regular readers of the Kcap Trading Blog you know the concern that we have recently expressed about this new rotation into the Dow which was stealing momentum from Tech land. Interestingly, this sell off in tech may have interrupted that process and can be viewed as a double blessing in disguise.

Better times ahead.

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