Gone Mining! 3-3-06

Good Evening.

It looked like curtains for the market when Intel (as Jim Goldman from CNBC screamed) "stunned everyone" with their negative preannouncement. He really needs to take a chill pill sometimes. Specifically INTC sited lost market share, lower revenue guidance, lower earnings guidance and most concerning slowing overall demand. Interestingly most market participants who had anticipated such an announcement due to the horrid performance of INTC stock recently used this as an opportunity to yet again jump on board the Tech band wagon. In other words, market participants did a nice job of fading the nervous Nellie's taking the market only a stone's throw away from the year's highs. In the last two hours of the trading day the Bears finally showed their stuff and managed to take the NASDAQ into negative territory closing at 2302. Volume was heavy and the breadth was poor at 17:12 negative.

Your friendly neighborhood Kcap Team has been quite long while the market inched higher over the last several weeks. The Bearish sentiment was pervasive and was exactly the reason for the markets slow upward climb. As of this week traders are finally faced with a more normal Bullish environment. The dip buyers are back and seem to have no problem buying higher on even the shallowest of dips. In fact, the sentiment will most likely show an extreme pickup in Bulls and drop in Bears on next weeks Investors Intelligence Polls. It always amazes us how uncomfortable people are to add long side exposure when the prices are low versus their eagerness to part with their cash when the market is at the upper end of the range. The lack of fundamental analysis and pure concentration on price movement is largely to blame and falls squarely on the lap of newly minted Hedge Funds over recent years.

The key factors for traders to determine is whether or not the upper end of the trading range is a way station before the market breaks to substantial new highs or an opportunity to get defensive. Many conditions need to fall into place for the market to continue exploring territory unseen since the year 2000. Strong corporate fundamentals, a favorable geopolitical environment, friendly inflation data and a cooperative Federal Reserve are just a few simplistic criteria that need to be firmly in place for the market to explore the heavens.

While many of the above mentioned seem to be falling into place, unfortunately we currently believe that the market is unlikely to make a sustainable run at this time. Our upside price target on the NASDAQ is 2340 - 2350 at best and we don't have tremendous conviction that the NASDAQ will even reach those levels and hold. The long term technical conditions of the market which seems to be filled with negative divergences such as contracting new highs, unconvincing volume and overbought conditions relative to other similar past chart patterns in the market make it likely that one final giant shakeout to NASDAQ 2150 will occur.

Many traders seem to be getting lathered up over the prospects of a rotation from the Energy Sector into Technology. If this were true than how do they explain Oil closing in on a 3 - 4 week high? Shouldn't we be seeing the energy complex continuing to show severe underperformance as Tech marches higher...hmmm?

Traders are also quick to spin all news positively. The negative report from INTC was spun to reflect positive implications for Advanced Micro Devices (AMD). If that is the case, then why did INTC outperform AMD today at the close? Traders have even chosen to focus on the second meeting that Google (GOOG) delivered on Wall St. which contained damage control as opposed to the truth which came out two days earlier about slowing growth.

All in all, as underinvested Bulls have morphed into dip buyers, with a healthy dose of performance anxiety, they will spin any news to support their behavior. However, perception is reality and it needs to be respected. Anticipating the exact end of the good cheer is a difficult task and should not be done too aggressively. We believe that this rally is late in the game and are taking opportunities to shift our portfolio into less extended names.

If You Held a Taser to Our Head:
Kcap is using any rallies at this point to slowly reduce long side exposure as well. We have brought our net long exposure down to approximately 65%. We are still willing to make buys in select technology names that have already been washed out and are showing signs of recovery i.e. Yahoo (YHOO) and Apple (AAPL). However, the most exciting sector that we have been building in recently has been Gold. The European Central Bank (ECB) which raised rates, further pressuring the U.S. Dollar is just another catalyst in this Bullish sector. More importantly there is a fundamental supply vs. demand imbalance taking place that should drive this commodity to eventually challenge the all time highs reached decades ago. We have been doing well and mining exposure in these attractive Gold plays over the last several weeks: GG, GOLD, PAAS, HMY and BVN just to name a few.

On a side note: Many of you have commented that we have not been posting on a regular basis. We apologize for the inconsistencies but must prioritize our workload between portfolio management, our Fee Based Clientele and the Trading Blog. Our business is kicking in nicely which is requiring us to take on additional employees. We are hopeful that with the additional support we may be able to provide more consistency. In fact we have been considering a new structure for how we deliver our trading thoughts to our clients and our readership…more on this later.

We expect to post again on Tuesday or Wednesday. Have a nice weekend.

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