"W" Doesn't Only Stand For Bush. 6-2-06

Good Evening.

This morning the Bulls were handed a perfect Nonfarm Payroll report that would keep hope alive for the Fed to pause at its next meeting on June 28th. Furthermore, the wage component of the report showed benign upward pressure in labor prices. The futures were up sharply on this news and it seemed like the market was finally going to show some follow through from yesterday's dramatic upside action. What did the Bulls do with this beautiful setup? They squandered it! At 9:35am the Bears took control and put a heart stopping downward Cliff into play which shook the confidence from the now famously wimpy Bulls. However, towards the later part of the day the Bulls managed to regain some of the losses and closed the market essentially flat. All in all we would chalk this up as a mild victory for the Bulls since they were able to hold mostly all of the gains from Thursday's stupendous move on the NASDAQ. In fact, breadth was positive today at 3700/2500 advancers to decliners and volume was moderate. Despite the mild victory, no one can argue the fact that the Bulls are very nervous and are quick to give up the ghost on the slightest show of aggression by the Bears.

The NASDAQ seems to have formed a "W" formation with this past Tuesday's drop as the second dip. The market needs to continue coming back from Bear assaults and will likely do so over the next few days. However, in all probability another retest of the lows or slightly below is something that the Bulls need to keep in mind before this market is out of the woods. The small "W" formation may help the Bulls suck in more of their kind before the most aggressive Bears create the larger double bottom with a major retest.

If You Held a Taser to Our Head:
The market cannot make up its mind of whether or not to be more scared of inflation or the new worry, recession. Hopefully the next major economic report that market participants will be focusing on (the CPI) will show benign inflation. Decelerating growth will not create too much damage for the Bull case as long as the market can be reassured that inflation is being kept in check. Also, keeping GDP growth above 2% - 3% is acceptable. Your friendly neighborhood Kcap Team is approximately 65% net long with much of our exposure tucked safely away in ETF's. That and our large cash hoard should provide a risk averse methodology to stay relatively invested during these very choppy times.

Have a good weekend.

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