Step By Step…5-24-06

Good Evening.

We finally had a good close. The SOX was strong most of the day which was instrumental in helping the broader averages put in somewhat of a reversal midday. The S&P 500 breached its' 200 day moving average but managed to come back and close above it. Volume was the heaviest of the year which doesn't hurt on a key reversal day. Up volume exceeded down volume however breadth was still negative. All in all today may have marked the beginning of the bottoming process.

Some may argue that Friday's up day would be the beginning of the bottoming process however; today's close looked more attractive and probably went further in restoring a little confidence in the Bulls. Confidence has clearly been a rare commodity these days falling further than the commodity stocks themselves.

For months your friendly neighborhood Kcap Team has been yammering about a "Decline From Hell" that would take the NASDAQ to around 2159 by the summer. We can finally say been there done that! Wish we could say that we avoided the pain. This decline was more relentless than even we anticipated as we have found ourselves more long than we would have liked. Many of our stocks have taken serious hits and we are angry at ourselves for not selling them down sooner into the decline. However, we still view the last two weeks as a healthy correction that needs to play out further and will ultimately lead to the rebirth of Technology leadership in the market.

The most likely outcome is for the market to put in a major relief rally near term and then chop around for several weeks setting the stage for the best Technology Bull market since 1999. Don't you get it? The market wants to shake you completely out before it launches for real.

Due to the fact that we have such a long term Bullish outlook on Technology Stocks we have adopted a strategy of maintaining core long term positions despite the pain of volatility. This does not mean that we will ignore the bounce when it materializes (aaaaaany day now) by selling some exposure and putting on some hedges. Simply put, volatility and pain are unavoidable and will likely reward those strong enough to essentially ride out the storm.

We know by now that all investors and traders are feeling serious pain and despair at this point in time. This decline has been brutal in its lack of opportunities to exit in any face saving manor. Many players are giving up and will not return to the stock market for a long period of time. Again these are the key ingredients that will deliver the big prize to the few, the proud…the investing marines!

If You Held a Taser To Our Head:
Keep your positions small per security and don't be afraid to completely unwind a bad portfolio of stocks in order to replace them with better stocks. You do not have to come back in the same stocks that you lost money in. In fact it is often prudent to swap into stocks that have not declined as much as the ones you are holding if the new companies fundamentals are solid. Make sure the stocks of the companies you hold have just reported strong earnings and guidance and are relatively free of controversy.

Despite the tremendous carnage and life changing action on your screens, you will likely look back at this time period as the best recent opportunity to prosper if you had only kept your cool and followed the above advice.

We recommend that you tape this advice to your desk and read it every day. We are wearing it on our foreheads!

We'll be back again on Tuesday.

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