Feeling Like Elvis…"Caught in a Trap" 5-22-06

Good Evening.

When a market goes down as relentlessly as this one has, more than the usual amount of traders finds themselves trapped in their long positions. For this reason, this correction feels much worse than the actual point declines in the major indexes would have you believe. Furthermore, many traders have been trapped in the most volatile issues which are suffering disproportionate declines compared to the major averages. All of this leads to a series of failed bounces…even when they do decide to show up. Support levels are melting like butter and panic is reigning supreme. Even companies with awesome fundamentals that just reported great quarters and stellar guidance are being sold with abandon.

Your friendly neighborhood Kcap Team loaded up the boat when the NASDAQ retraced all of its gains for the year by falling back to 2205ish. Since then we have joined the hoards of trapped long side traders as the NASDAQ has continued its' hideous decent. Today as a function of discipline we slightly lightened our exposure to provide a little breathing room and ammunition for when the market shows better signs of stability. While we strongly believe that tremendous buying opportunities are abundant, we are cognizant of the fact that the bottom has not fully formed and is a process that will take at least several weeks. Therefore, it's time for us to admit our mistake in getting too aggressive at NASDAQ 2205. We are still mostly net long and are willing to add to our posture but we must have stability first in order to carry a very aggressive posture. We define stability as two to three days of no bleeding.

We are still of the opinion that the NASDAQ is likely to launch a HUGE upward Spike very soon. However, the trapped longs will continue to sell the rally erasing most if not all of the expected upward thrust. That will be just fine as long as new lows are not made on a closing basis for the NASDAQ subsequent to the Spike.

Many guru's believe that the commodity bubble is simply catching its' breath and the money that has flowed out of that group recently will return promptly. We disagree and are expecting the rotation out of commodities and into technology to become even more apparent due to this most recent commodity melt down. While we do not doubt that commodity related stocks will get a sharp reflex bounce; in all likelihood new highs will not be achieved this year for the energy complex. However, the tech sector is still poised to resume the leadership that it once had so many moons ago and that so many traders reminisce about around the campfire.

If You Held A Taser to Our Head:
This week is likely to punish the sellers who have finally capitulated. The reflex bounce is imminent and will be enough to convince everyone that the correction is over. Remember, bottoming is a process that takes time that has many false starts. In other words, a "V" shaped bottom is unlikely.

Hope you traded well.

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