6-29-06 Holy Moly Batman!

Good Evening.

The market took off like a Bat Out of Hell; make no mistake about it, Hell is where many traders have been residing lately. The interesting thing of course was that most traders were caught completely off guard by the ferocity of today's action. In other words, unless you were willing to take some recent pain you most likely did not keep up with the major averages today. AHH…the market is a great equalizer.

The volume was impressive at 2.25billion shares and the breadth was very strong. Clearly this market was oversold and only needed the Fed in the rearview mirror in order for the market to start reverting to the mean. The critical element that needs to be analyzed in order to determine whether or not this is a one day wonder will be the aggressiveness of the dip buyers over the coming days. Should the dips (and there will be dips) turn out to be shallow the probability increases that this rally has legs.

The strength was so shocking to the underinvested Bulls and Bears that it would not surprise us if knee pad sales were to rise dramatically as many traders are praying hard to the Lord for any dip, please GOD any dip, to pour their now unwanted cash into some long exposure. Furthermore, there will be plenty of traders that will not believe that this rally has legs until it has truly left the station causing them to capitulate and chase. These facts alone are what will trump all fundamentals to take this market higher in the near term. However all bets are off if the Bears can somehow turn a shallow dip into something more hideous in the coming days. We'll just have to wait and see.

End of the quarter tricks will likely create bids under the high beta favorites tomorrow, especially with the new found Bullishness in the market. Therefore, we have increased exposure in the following names for a trade: CIEN, AKAM, BOOM, CNXT, CTXS, CTSH, HANS, and UARM. We also added exposure to some of our favorites, specifically: GOOG, YHOO, NTAP, XLE, HHH, and CSCO. We even initiated a position in VZ which seems to be acting better lately, most likely due to layoffs which will soon be finalized. We have some close friends that work at VZ and we are very concerned for them. We have decided to at least let them prosper in their portfolios with the addition of this stock. Wall St. always rewards companies that target expense containment through payroll reductions.

This market will likely be driven by sideline cash as opposed to fundamentals however it is always helpful to analyze the Fed. Today's Statement clearly demonstrated the Fed's awareness of the conundrum that they face. While many people on Wall St. have been obsessed with the fact that the Fed may overshoot thereby creating a recession, the evidence in today's language disputes that. Specifically the Fed mentioned, "The extent and timing of any additional firming that may be needed to address these risks depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." The language prior to today's statement did not include any risk of monetary policy on economic growth. The fact that the Fed chose to include a balanced approach today sends a message to the markets to chill and stop assuming that the FOMC is made up of a bunch of knuckleheads. The Fed also indicated that economic growth IS moderating which represents a difference from the language used last time which saw growth as LIKELY to moderate. This is another nod to Wall St. in order to calm the frazzled nerves of so many who have written off the Fed as completely oblivious to the notion that solid cooling in the economy is readily apparent.

If You Held a Taser to Our Head:
The only risk that the Fed has placed themselves in is the fact that they are relying on the cooling economy to eventually retard inflation. Potentially other global factors such as the weakening dollar and the high price of energy may keep inflation elevated despite the cooling of the economy (stagflation anyone?). This would certainly present the Fed with a dilemma not seen in decades though that outcome seems a low probability. However, even the threat of stagflation is enough to send Bulls scrambling to the sidelines especially with the cowardliness that they have developed over the past several weeks. Perhaps some shallow dips over the next few days that are bought along with the hope of strong earnings will slowly rebuild courage in the pathetic bovines that we have come to know so well.

This will be our last post of the week. We had a good day and we hope you did too.

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