This Market is Dangerous! 10-3-06

Good Evening.

So we finally got a new closing record for the Dow and even managed new intraday highs. Thank the Lord that we might just be able to move past this nonsense. Although the Bulls finally got what they wanted, the sad truth is that the prize seems more like an empty box. Inside its contents, one would hope to find some confirmation such as strong action in the NASDAQ, Semi's, Russell 2000, Transports, breadth, more new highs, less new lows and less negative divergences in order to add validity to the party. Unfortunately none of those important criteria have been met. We do not even have fresh money coming into the markets rather, rotation from desperate money managers out of the energy complex and into mega cap stocks. The leadership of this rally is indeed very narrow. What is even worse is that most of the money that has been chasing the Dow higher recently has been from reluctantly converted Bears who despise being long in the first place. How quick do you think they will be to hit the eject button at the first sign of a "failed" dip.

We are disturbed particularly by today's action in the fact that the NASDAQ did not recoup yesterday's losses despite the new high for the Dow. Furthermore, breadth on the NASDAQ was actually negative despite its 6 point gain. Even in the mighty Dow there was greater down volume than up volume today.

The extremely weak energy complex today seemed to be the only fuel needed (pun intended) to cause more high five's for the Dow Bulls. Bears, like Kcap, are having their stomachs churned faster than a rogue broker can separate his client's money from their pockets. Despite this pain, Kcap is continuing to use strength for laying out shorts, (primarily in the Semi Stocks) and using dips to partially cover. We have even decided today to maintain a large short position in SMH due to our fears that the major averages are in real danger of … how can we say this…doing their best impression of a famous Zeppelin (and we're not talking about the legendary rock group). In other words the danger of an imminent and sharp CRASH is alarmingly high at this juncture.

Weak corporate guidance or a few more reports like the one delivered from MRVL last night would firmly embolden the hard landing crowd. Imagine a little more domestic and geopolitical tension along with a whiff of inflation over the coming weeks. This is not the time to be swimming with other traders who have recently entered the long side of the market while they are feeling such duress.

If You Held a Taser to Our Head:
Many people talk about how an October surprise should be expected during Presidential and Midterm Elections. Your friendly neighborhood Kcap Team is thinking about a more ominous surprise in the markets. Should this occur, the stage will truly be set for the beginning of a long lasting Bull market led by the Large Cap Technology Sector. However, only this "Fall(s)" survivors will be there to benefit. All of the others will need a "Whole Lot of Love" while they walk their "Stairway to Heaven".

You've been warned!

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