Nothing Wrong...Yet. 2-21-06

Good Evening.

The market dripped down today like an old coffee maker as opposed to a percolator that at least creates some excitement. It wasn't that there were so many sellers simply that the buyers were MIA. NASDAQ 2296 was certainly good enough for many traders to book some profits (including Kcap) as we have recently been predicting. The question is whether or not this downside action will morph into something more hideous. At this juncture the answer is unknowable but our instincts are telling us that more upside is ahead. Whether or not the NASDAQ can breach the 2296 level will largely depend on an anemic showing from the Bears in the next few days. In other words, profit taking is totally acceptable as long as the Bulls can contain the Bears above recent support levels, specifically NASDAQ 2240ish.

The excuse that the Bears offered for today's downside action is concerns over inflation. The Minutes from the most recent FOMC meeting clearly showed that Alan Greenspan (remember him?) and company have been eyeing the high Resource Utilization (4.7% unemployment) and high energy prices that are passed through to the consumer as potential inflationary threats. They have also made it clear that future monetary action will largely be based on incoming economic data. The magic question is: What specific data will they find most relevant and how should it be spun?

After studying the minutes and recent FOMC communications, it is quite clear that the Fed will be focusing in on the Unemployment Rate, price of energy commodities, the level of robustness in productivity, and core CPI. Some might argue that higher energy prices might lead the Fed to believe that the dampening effect on the economy would be disinflationary (that would be wishful thinking from the Doves). For example: the Fed has made it clear that they are more concerned with the inflationary pass through effects from higher energy at this point in time in the economic cycle. In other words both a Hawkish and Dovish spin can be made for each of the data points above, regardless of their absolute value. What traders need to do is to take the Fed at their word as to which side of the table the Fed is sitting on for each data point. To repeat…we need lower energy, higher unemployment, higher productivity and lower core CPI in order to get the Fed squarely off of our backs.

If You Held a Taser To Our Head:
Until more clarity from these data points can be gleaned, the market is likely to flop around within the trading range obsessing over its inflationary fears. Sideways action is nothing to be upset about while it creates the opportunity for a little digestion for another attempt at the upside. Again, the key factor for the Bulls will be that the Bears do not get out of hand by closing below important support levels. We would also prefer to see this consolidation period not drag on for too long.

Hope you are doing well.

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