Over the last two weeks we made a tactical decision to step aside and not invest in the Short-Term Model Portfolio. In our view the news-driven environment did not give us much of an 'edge.' We were wrong.

Those subscribers who followed our "unofficial" recommendations did quite well over the past two weeks: first, a 15% gain in the Direxion 3X Financial Bear ETF (FAZ) and then an average gain of 8.15% at Thursday's close in our 5 picks from last week. Apparently, the lesson is "Trust the model, Luke!" 

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.

Last week six of the world's major central banks made a coordinated effort to reassure European bond market investors that in the event of a severe liquidity crisis, the banks are willing and able to provide emergency U.S. dollar loans. Global equities breathed a huge sigh of relief.

The news from the central banks was soon followed by equally good reports from Europe on progress toward greater fiscal unity and better than expected data on the U.S. economy. As a result, last week the Dow Industrials posted its second largest weekly point gain in history.

This model was bought on November 17th, sold on December 1st.

The Italian Prime Minister is departing the political stage, as expected, but the comedic leader will not leave his audience laughing.

News hit mid-day on Tuesday that Prime Minister Berlusconi agreed to resign after the new austerity budget is passed, which boosted equity markets in Europe and the U.S. The Dow closed up 101 points and the S&P advanced more than 1% as financials breathed a sign of relief. That's the good news.

Overnight, however, the European bond market sent a glaring vote of no-confidence when the yield on benchmark 10-year Italian government bonds soared to 7.41%.

You can't keep a good market down, especially during November and December.

As expected yesterday (November 2), the market quickly found a way to feel better about the possibility of Euro contagion: focus on the Fed. In his remarks after the FOMC meeting, the Fed chairman admitted that economic growth is frustratingly slow and “very unsatisfactory.” The Fed downgraded its economic outlook for the next two years and upped its unemployment forecast. In other words, the Fed finally admitted the reality of the New Normal.

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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This is earnings season, but you would hardly know it, as news from Europe continues to dominate. Most of Tuesday's (October 18) upside action can be attributed to rumors from Europe concerning a pending agreement by France and Germany to increase the EFSF.  Our expectation of a choppy market on Wednesday was accurate.

Judging from the skittishness of the equity markets, economic prospects have never been more ambiguous. On the one hand, reliable forecasters such as the Economic Cycle Research Institute (ECRI) are certain that the country is on the brink of an unavoidable double-dip recession. The ECRI believes that an economic asteroid is about to hit the planet and no one can stop it.

This forecast is quite a shock considering that as recently as February a survey of 27 mainstream and alternative economists predicted 3.3% GDP growth for the U.S. in 2011 and a similar figure for 2012. What happened?

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During August and September, the equity market bounced around wildly in a wide trading range driven mostly by news from Europe. This week the lower boundary of that trading range was tested once again. Our prediction, stated in SpearChat on Monday, was that this support level would hold one more time. So far, so good.

Indeed, the Dow Jones Industrials held that level, whereas the S&P 500 closed below it on Monday, but managed to stage a sharp reversal on Tuesday and posted decent follow-through on Wednesday (up almost 2%).

The Wednesday rally was supposedly on slightly better than expected employment numbers from ADP and a semi-decent ISM services report. The employment component of the ISM report slipped to 48.7, however, the lowest reading since April of 2010. No surprise that companies are doing more with less. In our view the real reason the market rallied was the 0.8% decline in the Dollar Index.

Energy, materials and technology led the way higher, not financials. Crude oil rallied 5%, its largest 1-day gain in 5 months, but still did not close above $80/bbl. The rally was due to surprisingly low inventories, not to rising demand. Moreover, a falling dollar tends to boost commodities. 

We are a week or two from the start of earnings season, which makes the market more susceptible to news from Europe in the meantime. Hopefully, once companies begin to report better than expected results, which they usually do, the domestically-driven news flow will buffer the worrisome din from the Eurozone.