That Cyclical Stock Stole My "Tech MO"! 5-8-06

Good Evening

Despite the NASDAQ closing in positive territory, today's action can only be classified as consolidation. The NASDAQ wanted to move to the upside several times but the Semiconductors were stuck in the mud providing the unfortunate anchor. Breadth was slightly weak in NAZZ land and the volume a tad light, more evidence of the consolidating nature of today's action. Even Oil, which showed weakness earlier today couldn't get the NASDAQ off of it's behind. Don't get us wrong, consolidation is exactly what the Dr. ordered after Friday's impressive gains. It's just that we would prefer to see a little more life in the Tech complex while the market moves sideways.

The market is exhibiting a strange phenomenon in the old Dow cyclical names. Money seems to be rotating to the CAT's, DE's, and IR's of the world despite the lofty price levels of these names. The strength in the global economy has unprecedented positive influences on these old cyclical names that may provide a longer lasting bid than most any market historians have been trained for. Furthermore, as money flows into this group the Dow will continue to levitate at the expense of the Tech heavy NASDAQ. We will be watching this phenomenon closely and have even decided to add some exposure into these Dow Cyclical names. The tough part will be to refrain from selling them once it looks like their ride is over. Traditionally they have not been good buy and hold candidates, but that perception might fast be coming to an end. Could it be that cyclicals are no longer two decision stocks?

This does not mean we are abandoning our Bullish Technology thesis. However the Tech sector may take a little longer to blast off than we had hoped for. More importantly the window is short for this potential blast off and our patience is starting to grow thin. Either way, we will be monitoring the situation closely and plan on maintaining heavy concentration in Semi's and Networking stocks for the time being.

On Wednesday the FOMC may deliver it's final rate hike before the long sought after pause. The Market will then have several weeks to debate whether the rate hikes are finally complete thus forming another glorious wall of worry for the market to climb. Many traders will focus on the language from the Fed on Wednesday. Some will extrapolate hawkish language as a sign that the Fed felt it necessary to talk tough since they are likely done raising rates. Others will not be so sure and the debate will continue. Either way, the FOMC minutes to be released three weeks later will be a much better tell if they have finally decided to pause.

If You Held a Taser to Our Head:
Kcap is still aggressively long, primarily Large Cap Tech, although we are slowly adding exposure to Large Cap Cyclicals to create a little more balance.

Our next post will be Wednesday afternoon.

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