Nervous Nellie's 9-18-06

Good Evening.

The Bulls continue to have the upper hand in their relentless pursuit of causing pain and anguish to all of the Bears and underinvested brethren. Even with today's flat action it is notable that the Bulls were able to contain the intraday cliff and actually managed to eek out another green day. Furthermore, the strength in Semiconductors continues despite a downgrade in INTC from Thomas Weisel Partners. Certainly the strength in Freescale Semiconductor (FSL) due to its buyout offer has not hurt the complex either.

The strength in the market over the past week has caused enough emotional damage to the Bears that they seem too timid to mount anything aggressive at this juncture. More importantly, so many Bulls were left on the sidelines that the 'buy the dip' mentality is likely to remain with us for several more attempts to the downside. In other words, we recommend that short sellers not get too aggressive at this juncture due to the fact that tops take time to play out. This does not mean that we are recommending for traders to chase the MOMO names to the long side. Instead we are simply suggesting that strength should be used to sell down long positions and shorting should be done gingerly until we see a series of failed dips. The makings of a failed dip will include lower highs, underperformance from the recent leaders (i.e. Semi's) and stocks acting lethargic in the face of good news.

We continue to be very concerned by the decreasing level of new highs versus a few months ago when the NASDAQ was at lower levels. All of our internal technical scans show us that this market is tired and is likely to offer a noticeable dip (1% - 3%) soon. The only thing missing is for sentiment to gain more Bullish traction. We will be watching the put/call ratio as well as sentiment polls from the news writers for this evidence. Again, your friendly neighborhood Kcap Team is unlikely to use weakness to get aggressively short. Shorting aggressively on weakness is too dangerous in an environment where there are so many Dip Buyers that may nibble on the bait. All in all, a 'short the rally' strategy (not too aggressively though) combined with a 'cover on the dips' seems like the way to go for the next week or so.

The other problem that this market has is the lack of conviction from both Bulls and Bears alike. There is tremendous nervousness as profit takers, especially the late coming longs battle it out against the stressed out pimple faced underinvested Bulls who feel the compulsion to buy. In essence both sides have the staying power of a nervous adolescent boy during his first sexual experience (that's very scary because he's all by himself).

If You Held a Taser to Our Head:
The only thing that the Bears were able to accomplish today was to dampen the recent momentum from the Bulls with that large intraday cliff in the afternoon. The likely scenario is for sideways choppy action to continue through the FOMC meeting this Wednesday. We believe that the Fed will continue to leave rates unchanged while providing a balance outlook with inflation and slowing growth in their statement. This will not be a surprise to the market and is likely to cause a sell the news reaction since the 'Fed is done' run-up seems to have happened. Don't get us wrong, the dip buyers are likely in place to stop the market from freefalling. However, should they fail to make higher highs the stage will once again be set for a retest of the year's lows.

We're watching with "baited" breath.

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