Bulls Drop Jaw! 1-17-05

Good Evening.

No, it wasn't that Japan was down 3% nor that Oil was bubbling higher on concerns over Iran and Nigeria. Traders can attempt to assign any excuse they want for today's decline but the simple truth is that too many participants de-positioned themselves in the last two weeks of December which created a mad scramble to redeploy exposure in January. Consequently we were left with one hell of an oversold bounce, topping the market out just in time for what is likely to be a normal seasonal earnings pattern. Volume was moderate at 1.7b shares, breadth was 2:1 negative, and once again advancing volume versus declining volume showed serious concerns at 2:1 negative.

We are aware of the huge disappointment that sits in front of most Bulls with Intel (INTC), International Business Machines (IBM), and Yahoo! (YHOO) after the bell. Although these companies clearly have "some splanin' to do" Lucy, the underlying fundamentals regarding the rebirth of the technology sector are still in play. This time, the only difference is that rotation is not only happening out of real estate and into the NASDAQ but within the tech sector itself. Desktops and mainframe services are just not happening and wireless infrastructure and consumer electronics are. The disappointments from INTC and YHOO seemed to also offer a little sample of the competitive inroads being made by Advanced Micro Devices (AMD) and Google (GOOG). Therefore we expect solid earnings reports from the aforementioned as market share has clearly shifted.

Initial support on the NASDAQ is around 2280. However that support was only likely to hold if a "sell the news reaction" were to occur from generally perceived positive earnings reports. The Three Musketeers (INTC, IBM, and YHOO) have done a stellar job of injecting fear into the fundamental technology story. The concept of rotation within technology will be contemplated later on. Therefore, with Bovines loaded up to their eyeballs with inventory, the first layer of support is not likely to hold for more than a reflex bounce. The next level of support around NASDAQ 2260ish seems like a more appropriate level to cover our currently large short exposure (specifically in Semiconductor land). Note: although we hold significant short exposure we are still 15% net long.

Fortunately for Kcap's Client portfolios, their overall gains in 2006 are appreciating after hours in the face of the carnage due to our well placed shorts. We expect to capitalize on our strong position by not forcing trades at the initial support levels but getting somewhat aggressive around NASDAQ 2260ish.

Mind you, we still expect only a tradable bounce from the 2260 level perhaps only 1.5% - 2%. The market will most likely roll over soon after, creating a more substantial sell-off than most would be comfortable with, perhaps NASDAQ 2150ish.

If You Held a Taser to Our Head:
It is still too early to buy but not too late to sell into strength. Do not allow the overanxious dip buyers to lure more of your cash away from you. This is a dangerous market environment and you're hearing this from a long-term Bull.

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