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 recommended buying the dips in Europe and Emerging Markets after the ECB announced its $641 billion Long-Term Refinancing Operation (LTRO). The ECB is lending a helping hand this holiday season to more than 500 European banks, a necessary intervention given the lack of institutional interest in subsidizing bank bonds.

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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!" 

Model recommended as a buy on December 15th, and as a sell on December 22nd.

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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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.

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.