11-27-06 Bears Have Window of Opportunity.

Good Evening.

After seeming like it never would, the market finally went down and down big! In fact, under the surface many of the high flying momentum favorites were crushed to the tune of 4% - 5%. Overall market breadth was atrocious and volume surged towards the end of the day qualifying today's action as a distribution day. Ironically, most participants especially Hedge Funds are quite relieved to see the smashing today. Every Hedge Fund seems to be viewing today's pullback as a long awaited opportunity to buy stocks at less extended prices. While this may turn out to be the right strategy for those underperforming Hedge Funds, the risks are quite high.

The problem that the current market faces, lies within the parabolic moves in the indexes. Simply put there are no good levels of support to stop the selling should it take on a life of its own. In addition, the Bears have been all but killed off over the past few months, leaving very few that are still short in the current environment. The lack of short sellers will exacerbate the decline due to the vacuum of natural bids that are usually in place for short covering purposes. Mix this with the newly minted anxious longs who would very much like to lock in profits and call it a year, and you have a recipe for a potential 10% decline in the NASDAQ.

Granted, your friendly neighborhood Kcap Team has been expecting a 10% decline for the past few months. In fact, a 10% decline from these levels would take the NASDAQ back to when we first started yammering about it…just to poor more salt in our eye. Regardless, today is a new day and we are only looking forward not backwards. The runaway market which has left Kcap and other Hedge Funds behind recently is not an excuse for emotionally charged investing with a lapse in judgment. We harbor many concerns about the ability of this market to continue without a large whack to the downside and today's sell-off opens a window of opportunity for the Bears.

However, should the market find support around these levels or slightly lower over the next few days, the stage will be set for another attempt to the upside to finish out the year. Should this happen, we will still consider the market in desperate need of a final washout to the downside before it commences the Large Cap multi-year Tech rally that we are excited about.

If You Held a Taser to Our Head:
Watch for signs of stability and leadership on any bounce that materializes over the next few days. A lower high after a bounce, being led by anything other than Tech would be foreshadowing more danger ahead. Furthermore, be aware that today's downside action came without any Macro or Corporate news of consequence. Do not be surprised if the market finds reasons to worry other than technical conditions in the near-term i.e. Geopolitical uncertainties and cold weather affecting the price of Oil. The dip buyers are still alive and need to be respected, but the Bears may have just woken up…too early to tell at this juncture.

Protect your capital.

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