Listen Up! 8-30-06

Good Evening.

In recent posts we have been harping on the fact that the NASDAQ is likely to ascend to the 2200ish level. We explicitly said that a pullback to 2100 - 2125 would need to take place first before we would see 2200 or better. Essentially that pattern has developed nicely although Kcap is experiencing frustration in not having been long enough over the past few days. Regardless of our frustration we have to acknowledge the fact that the market has mostly delivered what we were anticipating and it is now time to plan and position for the next big move.

The market's slow drift higher has done an excellent job of frustrating the underinvested Bulls who are lounging in beach chairs in the Hampton's. Perhaps this has been a function of end of the month window dressing or simply not enough traders at the turrets with authority to aggressively sell short. Whatever the reason the simple fact is that the likelihood of a serious move to the downside has arrived. The mix of seasonality, poor market internals (low volume and less new highs etc.), possible flare-up of the old geopolitical tensions and anything unexpected can wreck havoc on the market in it's delicate condition. Despite being a little too defensive in our portfolio's this week we will not allow that frustration to force us to participate on the long side in this late juncture in order to alleviate our recent pain. Instead, we are taking this opportunity to build our short exposure into the QQQQ and various Small Cap Technology stocks that have fundamentally disappointed recently.

Traders need to ask themselves at this point in time where the next 10% move is going to be. Expectations for significant upside from these levels is somewhat "pie in the sky" thinking and should only be reserved for the players with performance anxiety who are trying to catch the last cute move to the long side. Oh don't get us wrong, we certainly expect the high beta junk names to be the vehicle of choice for these long side desperado's. That will certainly be the tell tale sign that the Bull has completely run its course.

If You Held a Taser to Our Head:
We strongly recommend that all of our readers lighten up exposure and cut back position sizes at this juncture. We know that this sounds somewhat alarmist and we are probably a little early. However, playing with beta for another 2% - 3% upside move in the major averages does not seem too intelligent when we feel the downside over the next 2 months can be so severe. Remember, if the averages are down 10% over the next couple of months, some of the high profile beta stocks will be down 30% - 40% making it feel much, much worse for anyone trapped. Do yourselves a favor and this time do not allow Mr. Market to "B-slap" you just when he regains your trust.

We will discuss our concerns in more detail in coming posts but felt the need to get you out of harms way first. One more thing…if we hear any of you groan that we "got you out too early" we might "B-slap" you ourselves.

Talk to you later.

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