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.

(...click the headline to continue reading)

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?

(...click the headline to continue)

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.

The Dow closed up another 186 points on Thursday (September 15).  Index futures are down only slightly as we go to publish. Will this be another Freaky Friday? Maybe not.

On Thursday the U.S. indices advanced almost 2% on news that the ECB, the Federal Reserve, Bank of England, Bank of Japan and the Swiss National Bank are coordinating to supply dollar liquidity to European banks through the end of the year. The backstopping by the five central banks is not unprecedented; it happened in May of 2010, as well, at the height of the Euro crisis. In 2008 the Fed did the heavy lifting ($600 billion worth) all by itself.

This buys some time while parliaments in Europe debate the complex issue of greater financial unity among the 17 Eurozone members.

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...