The Next Sharp Bounce Will Not Mark A Bottom. 5-15-06

Good Evening.

The market continued its ugly ways with all major sectors bleeding from the eyes. The Semiconductors continue to act like garbage and wouldn't be able to find support from an Alcoholics Anonymous group. We believe that the SOX has a chance to make a stand at 475ish but we couldn't tell you if and when it will get there. The most likely course of action is for a couple of fake out rallies prior to that key level just to cause more damage and pain to all who dare to play. The Networking stocks have been equally scary and seem to fall 4% - 5% per day. One would think that the most atrocious fundamental news had hit the market or was looming based upon the severity and abruptness of the recent declines. The truth is: pullbacks happen! Perhaps traders need to wear a bib that says "Pullbacks Happen" as opposed to "Spit Happens". This can also be correlated to diapers but we won't go there.

The commodity stocks have also been dishing out serious pain which has morphed into wreckage in the Dow cyclical stocks. Across the board the carnage is severe as there is no place to hide except the money market. An oversold bounce is likely, however this decline has been ferocious enough to create a significant "sell the rally" mentality should a rally occur. All in all we would love to tell you that the "all clear" sign is in place but that is just not the case.

We need more pain and despair and that is just the way it is. Avoid the siren song of the very attractive prices for the time being. This does not mean that you should not slowly scale into the names that had recently delivered solid outlooks. Rather, we are simply suggesting that you do not load the boat until a few false starts can be tucked neatly into your pocket. If you are already long up to your neck, at least make sure that you are selling the names with so so fundamentals and replacing them with the real stars of the recent earnings season.

Always remember that the sharpest and best rallies occur when the near term trend is down. Recently down is an understatement, therefore expect some upside fireworks soon. Your friendly neighborhood Kcap Team will start scaling tomorrow and will use those fireworks to raise more cash.

If You Held a Taser to Our Head:
The most exciting thing about this decline once you look past the pain is that terrific opportunities have been created in some of our favorite technology names. Kcap is off the highest levels for the year but the names that we are eyeing are down much further. Like all good things in life, timing and scaling will be key. Don't rush things but don't be frozen either.

Hope you traded well.

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