Mixed Messages 3-30-06

Good Evening

The NASDAQ indeed surprised us with yesterday's breakout. What is even more impressive is how it held yesterday's gains above the important 2333 level. All the technical conditions underlying the market are precarious but Mr. Market does not seem to care at the moment. Perhaps this is a function of the end-of-quarter-window-dressing-games or maybe something beautiful is lurking underneath to create the stealth bid; more likely a combination of the two. Either way most traders have been caught by surprise (Kcap anyone?) and find themselves somewhat underinvested contemplating the resilience of the NASDAQ over the past week.

Importantly, many traders are speaking about a rotation out of the energy complex into tech stocks. This does not make much sense to us as the weakness in the energy complex is anything but apparent. Others are contemplating the rotation out of real estate into tech stocks. While we agree with this theory the effects are of a more gradual nature. The one area that seems rather glaring is the rotation out of long bonds into low quality technology stocks. The bond market is significantly larger than the stock market and can offer tremendous upside fuel to stocks when large institutions decide to adjust their asset allocation. However, it seems odd that players would be dumping long term fixed income instruments in favor of secondary MOMO technology stocks…but that's what the screens are showing. The problem of course is that as yields continue to climb from asset allocation adjustments, the headwinds start to build in stock land.

All in all, we are still of the belief that the NASDAQ is vulnerable here to revisit the lower end of the original trading range (NASDAQ 2240 - 2250). The only caveat is that the lower end of the range may need to be adjusted upward due to the recent breakout. Furthermore, should the market continue to make new highs before it pulls back, the possibility exists that a new trading range will have been created. We will be monitoring closely over the next several days for confirmation of a new trading range.

The new highs in the NASDAQ continue to show a downtrend which is most troublesome to us. However, the put/call ratio is still showing signs of skepticism even at these lofty levels. The price of Oil is sky high along with other commodities and long term interest rates are very perky. There are mixed messages everywhere, enough to drive a trader crazy! For this reason we are maintaining a rather balanced approach with a slight net long position and a hoard of cash, patiently waiting for better entry points.

If You Held a Taser to Our Head:
This is not a time to chase the market despite the feeling that "the train is leaving without you". While we acknowledge that the NASDAQ may achieve noticeably higher highs before the summer time, the choppiness that is still to be expected should provide ample opportunities for more attractive setups.

If you are underinvested, join the club and have patience.

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