The Bear That Cried Wolf? 10-30-06

Good Evening.

There are definite signs of "crackage" developing in the market over the past few days. Don't get us wrong, we have not been fans of the internal makeup of this rally since it started two - three months ago. Clearly most other Hedge Funds have not been willing to fully embrace, if at all, the persistent uptrend that the market has been involved with since mid July. This very fact has kept too many people on the sidelines and too many Bears caught short. This is precisely the reason why the Market refuses to go down as Bears continue to short and cover and underinvested Bulls pounce on every shallow dip.

However, have you noticed that today's up move has come on decreasing volume? The breadth was also nothing to write home about. The Semiconductors led today's action, which seems more like a reflex bounce from Friday's clubbing in that complex. The fundamentals in Semi land are questionable at best and the lagging action of that index versus the rest of technology is an ominous sign. Indeed, the Semi's have bounced off of their 50 DMA recently but will be in serious jeopardy should the SOX revisit that level and fail. Therefore, all eyes will be on the SOX level 444 - 448 should it decline to that range in the near-term. A meaningful breach below 444 would likely send the Semiconductor Index down to the 400 level. This would pressure the NASDAQ, which is greatly lacking support due to its relentless run to the upper end of the range.

The problem with this scenario is that every trader and their brother seem to be watching the Semiconductors for such a breakdown. For this reason, the expected decline continues to be elusive. Traders keep shorting and covering the SOX hoping to prosper from the inevitable fall but without much success. The constant short covering continues to make this trade crowded providing an annoying bid which helps prop the overall Market as well. Ultimately the downside trade is likely to work out, once enough traders give up. The give up is likely to occur when another Index starts catching some upward momentum causing rotation into the new vehicle. Our opinion is that the Energy Complex is showing early signs of life which may be the vehicle of choice. We also like the Gold stocks which also seem to be showing early characteristics of a bottom. Both the Gold Mining and Energy stocks are doing better than their underlying commodities, which reinforces our belief that further upside is likely in those two groups.

If You Held a Taser to Our Head:
Today's upside action in the NASDAQ came on light volume which does not bode well for continuation. Furthermore, end of the month 'window dressing' is likely providing an additional artificial bid. A sharp correction is looming and is only a matter of time. All players are actually hoping for such an event but need to be careful for what they wish for. Oh, and one more thing, there is a small event just around the corner called the Mid-term Election. This is usually an excellent catalyst for a change in trend, especially if the Democrats sweep one or both houses. Whether or not the Market declines directly in front or just after the election is immaterial, due to the fact that the upside seems limited at this juncture and the downside is so severe.

Be careful out there.

___________________________________________________
The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
___________________________

Click Here To E-mail Comments