Neutrality. 11-13-06

Good Evening

The Semiconductor Stocks finally joined the party when the SOX broke above its 200 DMA yesterday. Clearly the lack of participation from this group has been quite bothersome to your friendly neighborhood Kcap Team in embracing the overall two to three month rally. Simply put, we are not fans of a technology rally in which inventory issues plague the major chip companies of the world. Admittedly, other macro concerns as well as weak internals of the market have also kept us very much on the sidelines. However, the weak relative performance of Semi's has been a thorn in our horns.

Does the potential breakout of Semiconductors alleviate our fears, making Kcap unzip the Bear suit? Unfortunately not! We still believe this rally is being largely driven from performance anxiety and is likely to suffer a very bad ending. For those that have missed out or did not fully participate, there is a high probability that much better entry points exist in the not too distant future.

However, we have indeed covered most if not all of our Semiconductor shorts over the past few days due to the potential breakout in the SOX. INTC's +6% move over the past couple of days is noteworthy and shorting this group at this juncture is too painful for most, even Kcap. We have decided to position in a neutral stance while we wait for more evidence of a "blow off top" before we remount our shorts. In other words, we feel that it is way too late for fresh money buys but too painful to maintain large short exposure. Neutrality with a bias to the short side is our game plan for now.

Thankfully, we have been very successful at nailing the bottom of the Oil and Gold pullback. The upward moves in these names have been significant which has hedged us from being blown away from many of our short positions. Initially, we were able to cover our shorts on dips and then remount at higher prices. The rally has become so frantic lately, that the dips are now too shallow to play that game. Therefore, rather than shorting and covering higher, we find it more prudent to increase our cash exposure for the near-term.

If You Held a Taser To Our Head:
This market has been most unkind to anyone that has not been fully invested. The Bears have been all but killed off, which has created the conditions for the blow off top. Too hard to aggressively buy, too hard to aggressively short. Scaling out of longs into strength seems prudent.

Hope you traded well.

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