Last week’s Short-Term Model picks reflected a bet on silver (AGQ), global blue chips (DGT), China (HAO), Real Estate (REM) and Russia (RSX).  They were all down sharply as we bought them, in accordance with our contrarian model.  I said in that issue that it was quite difficult for me to make the selections, but all that effort paid off. Every one of these picks was up handsomely for the week.

Taking prices from the Thursday close, which we always use for tracking the performance of the picks we send out during the day on Thursday, the Model was up over 2% by late morning the very next day, Friday! Because that is a great gain for a one-week hold, we sent out a sell recommendation. But there was a lot more where that came from.  By the close on Tuesday, the next trading day after the holiday, the model was up just over 6% for the week, so if you missed the sell Friday morning, you were one happy pig the next day!

Last week we made a tactical decision to step aside and not publish a short-term portfolio. In our view the cross currents in the news-driven situation did not give us an 'edge.' The timing turned out to be excellent. The market put in a head fake for the bulls and corrected more than 4%.

This week, we are still not interested in buying the dip. Why? The major indices are testing the up-gap that occurred at the end of November. Such moments of enthusiasm are almost always revisited when the market is no longer surprised. The purpose is to check for a consensus among buyers and sellers. If sellers do not rush in around that area, then the breakout is assumed to be a valid move and less emotional buyers will step in.

Bulls and bears are evenly matched at this time, which means rallies are being sold and dips are being bought on a short-term basis. This is options expiration week, however, which often means that stocks get pinned to strike prices and do not move for a few days.

... and other mistaken prognostications.

Nouriel Roubini played right into the gloom and doom last Wednesday, saying in an interview that government gridlock ‘Ensures’ a 2012 Recession, and an hour later he said that the IMF does not have enough money to save Europe, and  "The contagion has now gone viral, cross Atlantic and global."…"It's a slow-motion train wreck."  He predicted, "at least a 50% probability" of a breakup of the eurozone in the next 2-to-3 years, which would almost certainly lead to a fast-motion train wreck.

Meanwhile, also last Wednesday, Pimco's Mohamed El-Erian told Bloomberg TV that U.S. economic conditions were "terrifying" and he cited the disappointing report that day on anemic U.S. economic growth and the Super Committee stalemate as delivering odds of one-third to one-half of another recession.

We argued that the European situation had become so dire, literally overnight, that there was no alternative left for world economic leaders but to do something dramatic, and do it immediately. There was no room for error, and so there would not be any error. It was must-do, and must-do right then.

After a few days of indecision last week, the market decided that Europe was no longer a problem. Despite a lack of detail, the major indices managed to rally almost 4% ahead of last night's EU announcement. Clearly, the market has a tendency to buy the rumor. Will it sell the news? Probably not. 

EU leaders have finally come to an agreement in principle on the three critical issues: bank recapitalization ($150 billion), Greek debt (50% haircut) and expanding the EFSF ($1.4 trillion) in order to make it easier for Italy and Spain to refinance. China is reportedly stepping in as a bond buyer of last resort and the ECB announced that it will also be buying more bonds.

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On Wednesday (October 12) the U.S. equity market posted its sixth advance in seven sessions.

The market mood was boosted by exceptional strength in Emerging Markets, while financials were the strongest sector, up 2.7%. Our Short-Term Model was up 8.1% as of Wednesday's close and our Intermediate-Term Model was up 10.6%.

Contrary to the pessimistic view from the Economic Cycle Research Institute (which says that the U.S. is unavoidably headed for a recession), Philadelphia Fed President Charles Plosser does not believe that growth will contract for two consecutive quarters. "Many of my business contacts suggest that while growth is very sluggish and uneven, they do not see the precipitous declines that many news accounts would suggest."

Plosser is an inflation hawk and voted against both Operation Twist and the Fed's promise to keep rates low through mid-2013. The reason?  Although Plosser expects sub-2% growth this year, he sees nearly 3% growth just around the corner in 2012.

For the past six weeks, the equity market has been bouncing around wildly in a wide trading range driven mostly by news from Europe. As that foreign tail wags our domestic dog, the major U.S. indices can whipsaw 5-10% in a few days in either direction. This is bad enough, but imagine the rollercoaster ride with leveraged ETFs. Thrill rides can be fun, but few find them amusing when one's security is at stake.

That said, our weekly buy candidates are selected based in part on their short-term oversold condition. It is our well-substantiated belief that buying after a pullback provides an entry with the lowest risk and greatest chance of reward. Up to a point, the deeper the pullback, the better the odds of a bounce.

Another way of putting this is that markets constantly fluctuate in a manner that moves from extremes back toward the mean or average price. You might call this Newton's Fourth Law of Motion. It is not a purely mechanical law, however, but rather a statistical law. Our analysis and our trading over the last 18 months have shown that a very oversold instrument is more likely to rebound than to continue on its downward slide. This gives us a powerful statistical edge.

Granted, it is not necessarily a comfortable method for most people. Statistically-based methods never are. It takes "intestinal fortitude" to follow Warren Buffett's advice and buy when others are fearful, but we are convinced that it is one of the best ways to make money in the markets.

In June, we published the performance of our Short-Term Model Portfolio from the March 25, 2010 inception date.  It was strongly up. It's that time of month,  when we take a look at how we're doing.  I've got only one word...WOW!  The model is up almost 38% for the year!  Good. Right?  But, since inception the model is up an astonishing 268%!

Click here to see the full history of our weekly picks.

Keep reading... 

As Yogi Berra once said, predictions are difficult, especially about the future. This amusing quip applies particularly well to the stock market, but it loses some of the humor in translation. During times like these, equity ‘securities’ are perhaps more aptly named ‘insecurities.’

Last week we published the results of the past 15 months of performance of our Short term Model Portfolio.Click here to access our weekly picks for the past 15 months. 

Spear's ETF Short-Term Model of weekly trades has shown an impressive 231% gain over the past 15 months!  For the same period, the S&P 500 is up only 10.3%.  For the last three weeks our Short-Term Model is up 16.6%!  An awesome standalone statistic; but compare that to the S&P 500 losing 3.3% over the same period.

How do we do it?

The Short-Term Model trades just once a week. Mr. Spear describes the system itself, so there is no "black box" behind it, and you can judge for yourself whether or not to follow it based on your own understanding of the market and the system. In a word, it is a contrary system, working on overbought and oversold funds that are in strong trends. It takes guts to be a contrary trader, but that's how our Short-Term Model Portfolio has made 231% in just 15 months, trading CONTRARY to most of the advice you see in the mainstream financial media.

As an ETF subscriber you already know we are bullish on Asia. Now that no one is talking about the Great Decoupling, it is actually happening. Emerging market equities have returned about 20% this year, while the S&P is up 8%. That is a feat of financial engineering that deserves to be recognized for what it is: a sea change. A paradigm shift.
 
Not only are the GDP differentials between Asia and the developed world quite extreme, but there are signs of Asian ascendancy in areas of technology and infrastructure. The world’s fastest commuter train and the world’s fastest supercomputer both reside in China. The world’s most powerful hydroelectric plant is not Hoover Dam, it is Three Gorges, again in China.
 
Moreover, Asia is no longer sufficiently defined as the developed world’s low-cost contract manufacturing workshop. Rather, Asia is now stepping into global economic leadership with autonomy and authority, gradually assuming the political prerogatives commensurate with that status.
 
In comparison to developed countries, emerging economies generally have sound private sector balance sheets and very favorable demographics. Moreover, they benefit from a growing urban workforce, in contrast to an aging and shrinking labor pool in the West. Australia and India both raised interest rates this past week at a time when having a normal monetary policy is a rarity. 
 
 

According to the Investment Company Institute, mom and pop investor threw more than $6.5 billion into domestic and global stock funds during a single week in January, the largest weekly inflow since May 2009. One Wall Street Journal commentator called it ‘dumb money.’