Investors are more bullish now than at any time since 2002. So a brief reminder is in order.

No matter how good the company's prospects, no matter how high or solid the dividend, no matter what the analysts are telling you, consider market risk.

Before you go long any risk asset, even if it's a great income stock that will provide a steady high yield no matter what the market does, consider market risk.

For those not familiar with the term, market risk is the risk that your investment will lose value because it gets dragged down in a falling market.

Most risk assets move in the same direction, regardless of whether they're stocks, commodities, or risk currencies. Most stocks move with the major relevant index, and most global stock indexes move in very close correlation.

How high is that risk?

First, look at the chart below of the S&P 500 for the past 14 years. Look at what happened to those who bought risk assets the last two times this bellwether index was at the current level (ok, another 50 points or so), back in 2000 and 2007. Markets plunged in the months that followed, ultimately ceding about half their value.

Sure, they came back. But why risk the opportunity cost? Moreover, if they take years to recover, what will your stock be worth in real terms, given how the Fed and other leading central banks are trying to debase their currencies?

(click to enlarge)

S&P 500 MONTHLY CHART1998 - PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

Second, ask yourself this: is there reason to believe it will be different this time?

Yes, but not for the better.

The underlying fundamentals behind the current rally are worse than they were in 2000 and 2007. Just a few highlights include:

• At those prior peaks, growth, earnings, employment, jobs were all improving, or at least not stagnant or materially deteriorating.

• There was no global deleveraging to hamper spending for years to come. As BoFA's Chief currency strategist David Woo reminds us here, US wage earners are just starting to realize their paychecks have shrunk.

• There was no unsolved EU debt crisis threatening to crash financial markets.

• The central banks behind the most widely held currencies were not openly committed to devaluing them and imposing another long term drain on our purchasing power through currency debasement.

I could go on and on, but this is meant to be just a short reminder.

The current rally has not been fueled by improved prospects of actual growth and wealth creation. Instead it's mostly due to:

• Investors desperate for income denied them elsewhere by central bank policies
• Printed stimulus cash seeking a home. This is indeed a difference from the past. The only huge question is how long it can continue without a loss of purchasing power from debased currency that does more harm than the stimulus does good.
• Most recently, sheer technical momentum (of course, at decade highs momentum will be good.

All of the above could continue, but few believe they're sustainable.

Even medium risk investments are only paying about 6%, yet a normal correction could cost you 10-15% of your principle for a long time (at least in real terms) and also means opportunity cost (in principle and income) of missing a better, post-pullback purchase.

Again, nothing new here, it's just a needed reminder. Remember what happened the last time.

Curious to hear your thoughts, dear readers.

It should only take about 120 seconds.

Please help me spread the word about how to protect oneself against central banks debasing the USD, EUR, JPY, GBP, etc, and stealing your savings by devaluing them and cutting the returns you can earn on them.

Please vote for vote "The Sensible Guide to Forex" in FXstreet.com's Awards-BEST NEW BOOK categoryhttps://www.surveymonkey.com/s/R8MLMC5

Voting ends early Friday Feb 25th.

For more info on the book, its topics, reviews, see: http://www.amazon.com/Sensible-Guide-Forex-Smarter-Survive/dp/1118158075.

I'd be especially grateful if you'd pass this request on to anyone with who has assets tied to the above currencies.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

• Conclusions, Lessons From Last Week For This Week And Beyond
• Weekly Currency Dilution Alerts
• A New Way To Help Save Your Local Currency

In part 1 we broke down last week by each day to identify the top market movers for Asian, European, and US risk asset markets, and to help sort out implied conclusions and lessons for the coming week.

Here are the big conclusions and lessons for this week and beyond.

CONCLUSIONS AND LESSONS FOR THE COMING WEEK

The Positive: Signs Of Health From China, US Trade Figures Friday

China's January trade figures exceeded forecasts, suggesting continued improvement in the second largest economy and the world's top growth engine. Imports surged 28.8%, versus an expected 23.5 %. Exports were up 25% versus and expected 17.5%. In sum, both China and its customers are spending more and showing greater health than expected. The only qualification to the data was that it was probably somewhatdistorted to the upside due there being an extra 5 working days in January 2013 than there were in January 2012.

The U.S. trade deficit plunged 20.7% to $38.5 bln versus an expected $46.0 billion. The shrinkage was due in large part to a drop in energy imports and a large rise in energy exports. Per, Bloomberg, this was the lowest petroleum deficit since August 2009. Year over year, barrels of crude oil imported fell to its lowest level since 1997.

Disturbing Development #1: Japan's Deteriorating Trade Data

Japan's deteriorating trade data is yet another sign of what appears to be an eventual (timing unknown) but thus far unavoidable crash of the world's third largest economy.

• Japan is an export economy, and so if healthy should post solid current account data.
• There are two reasons Japan's government has among the lowest borrowing costs in the world.
  • Japan' traditionally strong current account and trade balance is one of the reasons its sovereign bonds are bought despite their extremely low yields, despite its having the highest debt/GDP ratio in the developed world. Japan is like a high income individual with high debt, it's considered credit worthy based on its income.
  • The other reason Japan bonds sold at high prices and low yields was strong domestic demand, but that's fading too because its rapidly aging population (25% over age 65) is buying fewer bonds as more hit retirement age.

As these twin pillars supporting low Japanese borrowing costs crumble, Japan seems an economic disaster waiting to happen.

Japan cannot stay solvent for long if it's benchmark 10 bond rate rises from its current ~1% to even just 2% (similar to that of the US). Even at current low rates, its debt service expense consumes well over 25% of its national budget. I'm only talking about its federal debt. Leave regional and municipal debt for another time.

Just a 1% increase in its benchmark yields could double its debt service costs, which would become the majority of its budget. This will not end well. The only question is when. I'm hardly the first to point this out, but shorting Japan thus far based on its shaky fundamentals has been a loser's game. Those who have tried shorting Japanese government bonds in the past have lost badly, and the trade is thus known as "the widow maker's" trade.

Sure, Japan can always repay the bonds, because they can print all the yen the want. The question is what those yen will be worth. As long as bond buyers believe they'll be repaid in yen of equal or higher value, they may well continue to buy Japan bonds at these low rates.

So the real question on which Japan's fate depends, is how it plans on maintaining confidence in the value of the JPY, when they are aggressively trying to drive it lower?

Ultimately they can't have it both ways forever.

• They can have a much weaker Yen and boost exports, and their stocks.
• They can maintain confidence in the Yen and keep bond rates low, as long as their trade data remains sound.

Disturbing Development #2: Spain, Italy Threaten Fragile Confidence Risk Asset Rally

Here's the bigger near term threat.

The current rally in risk assets is, more than anything else, based on improved confidence concerning the biggest market moving issue since 2010, the EU sovereign debt and banking crisis.

That's all it's based on, confidence that all will be ok. Outside of Germany and a few other small funding nations, actual economic data and earnings in the EU have deteriorated.

Political events of the past week in Spain and Italy are the latest real threat to that confidence on which the rally that began this past summer

Background

The rally in EU stocks and the Euro began their latest rally in the summer of 2012 with the ECB's announced new OMT program to buy supposedly unlimited amounts of bonds from any EU nation agreeing to submit to the ECB's conditions for giving the aid.

These conditions are politically unpalatable, thus no nation wants this aid and the ECB has not had to spend a Euro thus far. It's been nothing but verbal support. Yet, that was enough to restore confidence in Spanish and other GIIPS block bonds. Their yields fell, confidence increased, and the EUR began its rally based on this presumed reduced solvency threat.

Of course except for lower borrowing costs, based purely on confidence that the OMT program will work, the situation of the GIIPS nations has not improved, and indeed has deteriorated.

Events In Italy Threaten That Confidence

For reasons discussed above on Monday's highlights, the rising risk of Berlusconi's return to power means that Italian policies could again send Italian borrowing costs soaring to compensate for perceived credit risk. Of course, a lot can happen before and after the Italian elections, so Berlusconi's return to power is far from certain.

Events In Spain Are The Big Threat

However the corruption scandal in Spain threatens the ruling coalition in Spain. For all its considerable faults, it remains the one most likely to continue to cooperate with the EU and avoid a bout of EU solvency crisis, or worse.

However it defies reason how markets can retain any confidence in long term Spanish solvency given the toxic combination of its deteriorating economy and utterly corrupt leadership. Highlights of Mr. Rajoy's leadership include:

Within about a month, from May to June 2012, Spain

• denies its bank sector needs a bailout,
• pulls off its largest bank nationalization and bailout ever (Bankia's 19 bln euro bailout)
• continues to insist that its banking system is "solvent" or in great shape,
• then suddenly, on the weekend of June 8-10m requests €100 billion from the EU to recapitalize its banks
• June 10: The day after getting the money, Rajoy admits the coming year will be "a bad one," including further GDP contraction and rising unemployment
• Recently, Spain admitted that even after this bailout, some of its biggest banks have negative value (aka insolvent)

Then this past week, after denying all corruption allegations, he admits to at least some. He's accused of receiving over 300k euros in illegal payments over the prior decade.

In sum, we have the current confidence in the EU's recovery resting on the ongoing solvency and recovery of Spain, a broken economy that can't repay its debts, run by leaders who consistently don't tell the truth about their economy until they need another bailout. Markets believe that bailout will come when Spain accepts OMT conditions. However we've no clear evidence that Spain will agree to the OMT's conditions. Why should it. So far the EU continues to bail out Greece due to fear of contagion, so why would it deny Spain, which is a much bigger contagion threat.

It's so easy to just print more Euros. Heck, when faced with contagion threat, it looks almost like sound, responsible policy.

EU Crisis Complacency Firmly In Place

Given the negative events in the EU this week, the EUR had its first real down week since the start of the year. However most analysts agreed that with indexes at decade highs, risk assets such as stocks and the EUR were due for a normal (5%-15%) correction anyway, and that the pullback should be viewed as both temporary and as a buying opportunity.

Indeed investor confidence in the EU continues to improve, and hit an 18 month high on Monday

Complacency Justified?

As we wrote in our conclusion to our summary of all 2013 forecasts here, and in our subsequent weekly reviews and previews, we're very skeptical about the prospects for stocks, risk currencies, and other risk assets to head much higher. Why? Here's the short version.

1. Technical Resistance

Look what happened the last two times stocks were at these levels. We use the long term monthly S&P 500 chart below as an example of what happened worldwide.

(click to enlarge)

S&P 500 MONTHLY CHART1998 - PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

01 feb 10 0052

I'm far from the only one to notice this. So if you doubt me, see here, for more from Nomura bank's Bob Janjuah.

2. Is This Time Really Different?

Yes, but not in a good way. When risk asset markets peaked in 2000 and 2007, the fundamental picture was widely perceived to be very good. Growth everywhere, no EU or US sub-prime crisis, contagion was just a medical term, etc.

The current rally is not the product of actual wealth creation or even the belief that it's coming. Rather it's the result of coordinated central bank intervention causing asset price inflation through lots of real (or threatened) printed fiat currency and historically low interest rates forcing those seeking yield into riskier assets. This isn't the place to go in depth into why this policy can't last, but it's widely understood that it can't.

Me: scan links esp 130207-5 at top of page for bearish articles to support w/ few sentences

Of course, plenty don't believe all is well. Some of the latest evidence includes:

• As we discussed in last week's post here, after saying last summer that it was merely auditing its gold reserves held abroad to make sure all is kosher, suddenly Germany is repatriating its gold from foreign storage facilities. It claims there's no issue of trust, of course.

• This move comes as part of a series of steps we mentioned in the same post here that Germany has been taking to prepare for future EU turmoil.

• We already know that Japan and the EU ex-Germany are struggling.

• As for the US

• Per David Rosenberg, Dow Theory Says To Be Bullish, But I Can Think Of 8 Reasons To Be Bearish

• Yet even Dow theory guru Richard Russell is skeptical about the upside potential:

Dow theory guru Richard Russell has alerted his subscribers that a Dow theory buy signal seems to be on the horizon. But he warns that there are other technical indicators that give him pause. "Wait, note that the relative strength index (RSI) is at its severe overbought zone for the first time in almost two years," wrote Russell. (from businessinsider.com Thursday market wrap)

Given the above technical and fundamental picture, we remain unfashionably bearish, without even touching on geopolitical risks in Southeast Asia (Japan/China) and the Mideast (Israel/Iran/Syria/Egypt, etc).

Weekly Currency Dilution Alerts

Because few others seem to care about the topic, despite the risk to anyone with significant exposure to the USD, EUR, JPY, GBP, etc, we continue to sound the alarm about the stealth tax that major central banks of the world have in store for you by making your money worth less than it is today.

The EUR

As noted above, future bailouts for Spain, possibly Italy too, are likely to be affordable only with printed funds. Also, ECB head Draghi hinted this past week that further EUR appreciation might require ECB intervention.

The Yen

As noted in part 1, the latest money printing headlines continue to roll in from Japan. The early exit of the current BoJ Governor means the new administration may start printing new piles of JPY sooner than previously expected. That was good news for Japan's exporters and stocks, because the belief is that a cheaper JPY will boost their returns. However it will also lower the value of assets held in Yen. While that's definitely bad news for Japanese savers, it could become a real problem for Japan if bond markets decide that the risk of being repaid in diluted yen deserves to be compensated in higher yields.

Your humble author is not the only one to see this problem. As noted in seekinalpha.com's market currents column for Thursday:

5:31 AM Shinzo Abe's desire to appoint a Bank of Japan governor who will boldly go where no BOJ governor has gone before is hitting opposition in his own cabinet and among financial bureaucrats, who fear that radical new policies could spark a dangerous rise in bond yields (Emphasis mine). It could mean that the Japanese PM might have to settle on a compromise candidate, especially as he needs the consent of the parliament's upper house, where his LDP party lacks a majority.

The GBP

We've been watching the BoE for a while as it seems to be moving closer to some kind of policy that weakens the GBP. Again from seekinalpha.com's market currents column for Thursday, news of reduced purchasing power for the Sterling:

7:19 AM More from the Bank of England: Coming to a Fed decision near you? "CPI inflation is likely to rise further in the near term and may remain above the 2% target for the next two years … it (is) appropriate to look through the temporary, albeit protracted, period of above-target inflation."

The USD

While the ECB and BoJ have done more talking than actual money printing as of yet, the Fed continues to print $85 bln a month, and believes it can do so without undue risk to the USD's credibility

7:57 AM What if the Fed is beating a donkey (an economy with 1% growth potential) for not being a horse (3% growth), writes Jeremy Grantham, wondering if the man (Bernanke) who missed the greatest macro event of our lives is also making an incorrect assumption about the economy. "Fine-tuning economic growth … is hardly likely to get any easier by badly overstating trend-line growth … The Fed will keep trying to whack the donkey for far too long."

A New Way To Help Save Your Local Currency

First, if you haven't done so already, see here (North America)or here (outside of North America) for information about the most up to date guide on a wide range of conservative strategies to diversify into the currencies most likely to hold their value, and the assets linked to them. You can find a topic summary, reviews, and even read huge chunks of the book.

There's nothing better to convince central bankers to respect their currency than having masses of investors dump it in favor of better ones. Until they impose capital controls, we don't have to take their abuse.

Second, for this week only, we have another tool to spread the word about the dangers of the global trashing of fiat currency and how to cope with it without undue risk, training, or aggravation.

I Need Your Help

There's nothing like a nice award from an important currency site to attract some attention to the cause.

Please take a moment (about 120 seconds, actually) and cast your vote for "The Sensible Guide to Forex" in FXstreet.com's Awards 2013 in BEST NEW BOOK category. The link to the survey is here.

Thanks in advance for your kind assistance.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The corruption scandal in Spain and resurgence of anti-market PM candidate Berlusconi should continue to create uncertainty with a distinctly bearish effect, for reasons we discussed in earlier posts here, here, andhere.

Until these are settled the uncertainty will pressure the pair. Keep an eye on related headlines, but especially on the bond yields of both nations. Steady of falling yields suggest steady or rising confidence in their creditworthiness, while rising yields suggest the opposite. Last week yields rose for both nations and are likely to continue to do so as long as political evens suggest these nations' economic troubles will continue or worsen.

The coming sequestration battle is where many expect the Republicans to push for spending cuts, at least for a while. That could result in layoffs for tens of thousands of government employees, and limit their spending, as well as the spending of those who sell to them. That uncertainty, combined with the recent payroll tax cut expiration means wage earners are now taking home less money than they were a few months ago.

While that likely drop in consumer spending more directly effects the US than Europe, it is clearly a risk-off, bearish phenomenon, and so is likely to hurt this pair, which is a risk asset.

See here for further details.

Except for China and Germany, most of the largest economies continue to contract, as in the EU, or struggle to hit modest growth (US). In fact, US Q4 GDP for 2012 put total 2012 GDP growth below at 1.5%. Per Bloomberg's Rick Yamarone (via Art Cashin here):

The year-over-year change in real GDP was 1.5 percent. There has never been a time since measurement commenced in 1948 when the annual pace of real GDP has fallen that low without the economy ultimately slipping into recession. Sub-2.0 percent readings are historically the warning signal.

While historical patterns aren't guaranteed to repeat, it's hard to bet against that kind of track record.

Is there any compelling reason to say things could be different this time?

As asked said in our summary of all 2013 forecasts here and here, how much do you believe the historically unprecedented global stimulus will make a difference, at least for asset prices?

Of course, you can argue that 2012's limp GDP came after over 2 years of steady stimulus, so while that may help asset prices, it's clearly not turning things around.

5. Technical Picture: Bullish Momentum Vs. Bearish Resistance

On the one hand, risk assets in general, and the EURUSD in specific, have strong, entrenched upward momentum. Even last week's pullback did not change that yet. However, after having decisively breached strong resistance at the 200 week EMA the pair has now returned to that level, which now serves as support. If the pair closes the coming weeks below that level, the rally would indeed be in doubt because the 200 week EMA would again be viewed as a strong resistance level that bent but did not break.

See here for charts and further details on the full technical picture for the pair, including a look at the divergence with the S&P 500, and what the decade high level S&P 500 chart tells us about the prospects for risk assets like the EURUSD

Hint: Would you bet that risk assets have much more room to move higher? Look what happened the last two times the S&P 500 (as good a single picture of support and resistance for risk assets as any) reached these lofty levels?

(click to enlarge)

S&P 500 MONTHLY CHART1998 - PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

01 feb 10 0052

Look what's happening out in the streets
Got a revolution Got to revolution…

One generation got old
One generation got soul
This generation got no destination to hold…

Who will take it from you?

Volunteers of America, (excerpt) from Jefferson Airplane

An awesome rock & roll classic, listen here.

I don't know if my generation still has soul, be we are definitely getting sold (out). The Fed, ECB, BoJ, BoE and others are either actively debasing their currencies, and along with them our savings and anything denominated in it.

You can't fight the Fed? Well here's a chance to strike some "blows against the empire" of these central banks and their very real financial repression.

Who will take it from you?-These same central banks (in the name of fairness, of course).

We have one week, until this Friday, to strike a small blow. How?

Help show the investing community a range of safer, simpler ways to diversify into healthier currencies, (or assets linked to them) that are run by honest central bankers who aren't out to rob us in order to fund their debt payments with inflated currency.

First, if you haven't done so already, see here (North America) or here (outside of North America) for information about the most up to date guide on a wide range of conservative strategies to diversify into the currencies most likely to hold their value, and the assets linked to them. You can find a topic summary, reviews, and even read huge chunks of the book.

Assuming you like what you see…

Second, please take a moment (about 120 seconds, actually) and cast your vote for "The Sensible Guide to Forex" in FXstreet.com's Awards 2013 in BEST NEW BOOK category. The link to the survey is here.

A win might help draw some additional attention, and help others hear about how they can be liberated from the ongoing financial repression.

I know something about markets, but not so much about book marketing. So your vote would be greatly appreciated.

Thanks in advance for your help.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Here's the first of a two part article.

• Part 1: Top Market Movers: Daily Diary
• Part 2
  • Conclusions, Lessons From Last Week For This Week And Beyond
  • Weekly Currency Dilution Alerts
  • A New Way To Help Save Your Local Currency

The big market mover was political uncertainty in Spain and Italy, which sent markets down hard on renewed twitches of EU angst.

Asia

Leading stock indexes, our best overall risk appetite barometer, were mixed with modest up and down moves but overall higher on:

• Signs of recovery from Japan's battered consumer electronics makers
• Expectations of continued JPY weakness and thus better growth for Japan
• China's strong non-manufacturing PMI, a bullish sign that the world's chief growth engine is finishing its slowdown of sub-8% GDP growth

Europe

Virtually all major indexes were down hard, 1-2.5%, and Spain's indexes plunged nearly 4% on as a high market, vulnerable to any kind of negative news, got just the excuse it needed for the inevitable profit taking session. The big news of the day was that political uncertainty in the EU's major debtor nations:

• Spain: A growing corruption scandal involving Spain's Prime Minister Rajoy, including allegations that he and other party members took bribes. As we discuss below, the PM already has a record of outright lying that's exceptional even by the standards of Spanish politics. However any political uncertainty, especially in Spain, is particularly upsetting for risk asset markets.

The EU won't survive without a solvent Spain, and much of the reason for major global stock indexes being near all time highs is that the EU crisis is believed to have been stabilized. Anything that undermines that dubious assumption will be poison for risk assets world-wide, as the EU remains very much a solvency risk that could crash markets. See below in our conclusions section for more on that.

• Italy: Former Italian PM Berlusconi's rise in recent polls threatens to return him to office. He was forced out when demand for Italian bonds and stocks plunged due to his perceived mismanagement of the economy. Markets don't want him back. His campaign platform includes populist but irresponsible promises to revoke "German imposed" austerity policies, and revoke an unpopular property tax, whereas Brussels and markets want to see policies that will reduce Italy's debt. Not surprisingly, yields on Italian benchmark 10 year notes moved higher to reflect the increased risk.

These developments sent the leading indexes, and EUR, down sharply. For all the recent bluster from EU leaders about the EU crisis being solved, the day's events revealed the true fragility of market confidence.

US

US markets followed Europe sharply lower for their worst day of the year, for the exact same reasons. Analysts also followed their European counterparts, and saw the move as part of an inevitable temporary correction that should be viewed as (surprise!-not) a buying opportunity.

Tuesday essentially saw a technical bounce on little news

Asian indexes were up, and Japan soared 3.77%, on further hopes for a weaker yen and thus stronger exporter growth. This time the reason was news of the current BOJ head's early exit. His replacement will be PM Abe's man, which suggests that more stimulus could be coming sooner. That was the biggest headline of the day.

Helping the optimism was a report from Societe Generale, which said that Japan would win any "race to debase," (aka currency war) because it's the only Asian nation where a weaker currency boosts stocks because Japan's stocks move with the fortunes of exporters. Other Asian nations' stock markets move with capital flows, and so weakened currencies could spark stock selloffs in those nations.

European indexes finished mixed due to pressure from a combination of factors, including:

• Continued political uncertainty about Spain and Italy: That instability could complicate keeping confidence in their creditworthiness up (and thus yields low).

• A series of weak corporate earnings reports

• An open disagreement between France and Germany on whether to join the currency wars and weaken the EUR. France wants a weaker, Euro, Germany doesn't, saying that the EZ's path to recovery is via "strengthening competitiveness rather than weakening currency."

US markets closed flat, and lacked any clear market mover.

Asia closed mixed, with Japan down almost 1%, surrendering much of Wednesday's gains on profit taking due to a combination of relative JPY strength and caution ahead of the ECB meeting later that day.

European indexes and risk asset markets were all down solidly 0.5 - 1% or more after ECB President Draghi's downbeat comments on economic weakness in the EU.

A Spanish bond auction showed Spain's borrowing costs rising, however it was not mentioned as a market moving event in the mainstream financial press. See below for more on that.

That was the only really significant market moving news of the day. Disappointing earnings results from drug Giant Sanofi didn't help either.

Traders remain complacent about EU risks, and see the recent pullback as just a normal technical correction, with weak earnings, a major corruption scandal that could unseat Spain's PM, and the threat of anti-market boogieman Berlusconi returning to power as just excuses for a selloff that was bound to happen.

US markets closed modestly lower on minor profit taking due to a combination of follow through from European weakness and weak data.

Asia closed mostly higher, aided by positive China data, but Japan was down almost 1% on some profit taking spurred by EU events noted above, and aided by disappointing current account data, which showed it has the smallest current account surplus since 1985. While it got little play in the press, this is a very disturbing sign for reasons we discuss in the conclusions section below.

European indexes soared on a combination of upbeat Chinese and US data, and an agreement that removed some uncertainty regarding the EU's long term spending plans. It introduced the first spending cuts ever to the 2014-20 budget.

Please proceed to part 2 for conclusions and lessons for this week and beyond.

A New Way To Protect Yourself And Others From Central Banks Abusing Your Currency

Regular readers know I've been sounding the alarm for anyone who has heavy exposure to assets linked to the USD, EUR, JPY, or GBP, among others, and notifying readers about my collection of simpler, safer ways to get that critical currency hedge than generally found in guides on currency trading or foreign investing. See here (North America)or here (outside of North America) for more information on it

For this week only, there's a new way to help spread the word. You can find a topic summary, reviews, and even read huge chunks of the book.

There's nothing better to convince central bankers to respect their currency than having masses of investors dump it in protest. Until they impose capital controls, we don't have to take their stealth tax without a fight.

Second, for this week only, we have another tool to spread the word about the dangers of the global trashing of fiat currency and how to cope with it without undue risk, training, or aggravation.

I Need Your Help

There's nothing like a nice award from an important currency site to attract some attention to the cause.

Please take a moment (about 120 seconds, actually) and cast your vote for "The Sensible Guide to Forex" in FXstreet.com's Awards 2013 in BEST NEW BOOK category. The link to the survey is here.

Thanks in advance for your kind assistance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Political turmoil in the EU remains the big potential market mover and the most unpredictable wildcard in the deck this week. We've continued to insist each week that EU risk has been vastly underestimated, for example, in last month's 2012's Biggest Lie, 2013's Biggest Risk.

Political turmoil in Spain and Italy clearly shook confidence Spain and Italy, the two largest debtor nations in the EU and thus the biggest solvency risks.

That reduced confidence showed up in the particular metric that matters most - bond yields. These spiked higher for both Spain and Italy this week. Markets (other than the EURUSD and other EUR pairs) shrugged off the news, but the EURUSD took its biggest weekly hit in since the summer.

As we discussed in our recent article on last week's lessons for this week, political turmoil in both nations is especially significant because the only thing keeping their bond yields down has been a questionable confidence that these nations were somehow on the mend, despite the lack of any supporting evidence. On the contrary, actual data on both shows continued contraction, even before this week's disturbing developments:

• Spain's PM Rajoy was caught telling his second whopper of a lie since his claim last May that Spain's banking sector didn't need a bailout. See here for details.

• Italy's former PM Berlusconi is making a serious bid to regain power, mostly by playing to populist anti-austerity sentiment, the same attitude that had bond markets virtually boycotting Italian bonds. See here for more on that.

Ever since ECB President Draghi announced the OMT program in September, bond yields for Spain and Italy had been heading lower. As we've pointed out in past articles, ever since US elections and austerity debates stole the spotlight, numerous EU heads have declared the EU crisis over, despite the obvious fact that nothing had changed except for the dubious assurance provided by the OMT program.

Ignore the politicians' claims about the EU crisis being over. Their talk is cheap. Bond markets are betting real money, and bond yield trends remain by far the best true indicator of confidence in a given nation's solvency risk.

• For Spain: Corruption Scandal Headlines. For all his faults, markets don't want to see PM Rajoy lose power at this time.
• For Italy: Watch how Berlusconi fares in polls as Italian elections approach on the 24th/25th of February. Markets correctly view him as a poor manager of Italy's economy. If he gains in the polls, expect Italian (and possibly EU and global) asset prices to move lower and vice versa. While not expected to win, there is a real risk that he garners enough support to become a necessary part of a coalition. That could complicate efforts to make painful reforms needed to maintain market confidence and prices for Italian stocks and bonds, given Berlusconi's populist platform.

One of the sharpest observations I read last week came from BofA/ML's top currency strategist David Woo. He noted the unusual divergence between the rising S&P 500 (implies optimism) and falling US consumer sentiment (implies pessimism from those who provide 70% of US GDP).

His take: just as the positive effects of the 2011 payroll tax cut took a few months to hit consumer consciousness, so too the coming months will bring declining spending as wage earnings realize the expiration of that payroll tax cut is over and they're making less money.

Meanwhile, he warns, the additional spending cuts from the approaching sequestration, due to start March 1st, will exacerbate the pressure on consumer spending. See here for details.

Consumer sentiment surveys can be market moving, however, the real test is what consumers actually spend. Watch US retail sales Wednesday for the latest update on how consumers really feel.

It's a typical mid- month medium weight calendar.

Big themes and highlights not already discussed above include:

Monday- Tuesday

Bank holidays in Japan and China should limit Asian liquidity and volatility Monday and Tuesday. China's bank holiday extends through the week, and there isn't much in the way of Japanese data other than a BOJ rate statement that is not expected to show any changes. The calendar thus provides little event risk from the big Asian economies (Aussie and NZ data rarely move markets beyond their own currency pairs).

Wednesday

• ECB President Draghi speaking, and the question is whether he continues to jawbone down the EUR or backtracks on his prior week remarks

• US retail sales

Either of these, or both, could be market moving. Draghi's remarks could easily move the EUR or markets as a whole if he continues to be downbeat about the EZ and attempt to talk down the EUR.

US retail sales could be influential if they surprise either way. As noted above, the payroll tax hike and lingering threat of job loss from sequestration should pressure retail sales. An upside surprise, however, would feed the prevailing risk asset uptrend, and news that conforms to ongoing trends tends to get more attention and reaction than new that contradicts the ongoing trend, which remains firmly higher despite looming decade highs on so many major stock indexes like the S&P 500.

Thursday

There's a wave of preliminary GDP reports from the EU. By themselves they tend to be second tier, however if they all point in the same direction they should be influential, as a rule. What makes me hesitate is that in recent months, with the risk asset rally in place, markets have tended to focus on German results when positive, and shrug off the usual signs of deterioration elsewhere.

Friday

G-20 meetings might provide some comments on the risks of competitive devaluations.

US UoM consumer sentiment: Likely to be influential only if it is in-line with retail sales data from Wednesday. Sentiment is interesting, but only insofar as it predicts real consumer spending. We'll see real data for that Wednesday.

Most risk assets remain in firmly entrenched up trends. Note however:

Most of the time, the EURUSD and major stock indexes, perhaps best represented by the S&P 500, move in the same direction, because both are bellwether risk assets.

For a full discussion of that correlation and the definition of risk versus safe haven assets, go to my book'samazon.com page, and use the "Look Inside" feature to skim through the exceptionally detailed table of contents and index. I had to fight my publisher a bit for that extra detail, and she was kind enough to make the extra investment. So take advantage of it. You can read huge chunks of the book, my treat.

They diverged this week, with the S&P 500 index heading higher while the EURUSD made its first serious 1 week drop since this past summer, due to a combination of:

• Political instability in the EU nations that can least afford it
• ECB President's Draghi's successful attempt to talk down the EUR at last week.

See here for details on these.

The S&P is still moving higher

(click to enlarge)

S&P 500 WEEKLY CHART

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

05 feb 10 0853

Meanwhile the EURUSD, has not only fallen back (no big deal by itself), more significantly, it is now sitting right back on the major 200 week EMA (violet) that it had breached just 2 weeks ago.

(click to enlarge)

EURUSD WEEKLY CHART MAY 2010 - PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

06 feb 10 09 00

The fact that it has returned to its 200 week EMA (violet) raises some doubts about whether it can hold above what had been very significant resistance and so raises doubts about its continued upward move. If it breaks back below it, that would be raise greater doubts about the EURUSD rally, because it would reaffirm the 200 week EMA (violet) line as resistance, and negate the prior break above as merely temporary.

We're not going to get too excited about a potential reversal for risk assets yet, however, because both this EURUSD pair and the S&P 500 index still have lots of upward momentum.

We're not going to get too excited about a potential reversal for risk assets yet, however, because both this EURUSD pair and the S&P 500 index still have lots of upward momentum.

Long term momentum on both the weekly S&P 500 chart, as well as the weekly EURUSD chart, is still strong, as shown by such compelling indicators as:

Both remain within their double Bollinger band buy zones. See 4 RULES FOR USING THE MOST USEFUL TECHNICAL INDICATOR, DOUBLE BOLLINGER BANDS for details on using and interpreting this indicator.

The various exponential moving averages (blue, yellow, red, violet) are all trending higher too, another sign of entrenched upward momentum.

For those who don't already keep an eye on the EURUSD trend, consider doing so, even if you never trade currencies. A few reasons to do so include:

• It's an excellent overall barometer of risk appetite (as is the EURJPY) that is more sensitive to global events than the major US indexes

• The stronger its uptrend, the stronger the EUR and the weaker the USD, because these two currencies push each other in opposite directions. USD strength or weakness has wide ramifications in currency and commodity markets (as well as in stocks but to a lesser degree). I discuss these inter-market relationships between the USD and other assets in my book. At least some of that you can read for free on the book's amazon.com page, using the "Look Inside" feature.

(click to enlarge)

GOLD WEEKLY CHART MARCH 2010 - PRESENT

04 FEB 10 0713

The question is, in the short term, which way?

The short term fundamentals are contradictory. Gold is primarily a fiat currency hedge. Long term the effects of debasement of the most widely held currencies make this a long term buy. Much of the hot money has already been flushed out, so further drips might not bring much new selling.

Meanwhile, the ECB and BoJ have talked about new stimulus but done nothing. If they actually start printing soon, that could give new upward impetus to gold.

The overall trend remains bullish, and pennant patterns like the one we see above tend to suggest continuation - for which long term trend?

The problem here is that we've a long term downtrend dating back to July 2011 on the weekly chart shown above, sitting with a decade long uptrend, shown in the monthly chart below.

Currently gold sits at its 50 week EMA (red), which has been strong support for over a decade, rarely breached for more than a few weeks. A decisive break below that would open the way for a test into the 1580-1550 level. However I've heard a lot of anecdotal evidence suggesting that there will be plenty of buying on breaks below 1600.

(click to enlarge)

GOLD MONTHLY CHART 2001 - PRESENT

03 feb 10 0711

As we warned in our summary of 2013 forecasts - beware of fighting the Fed, especially when joined by the ECB, BoJ, and potentially the BoE and PBOC.

In sum, the likely big market movers are not coming from the calendar, but from less predictable EU and US political developments, and the weight of decade old technical resistance bumps against the upward thrust of asset price inflation from the central banks of the world's largest economies.

Recent history suggests you don't bed against the Fed et.al. However it's going to be tough convincing most investors to open new longs given what has happened the last time major indexes were this high.

(click to enlarge)

S&P 500 MONTHLY CHART1998 - PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

01 feb 10 0052

Look at that chart above. We are now at the far right side. Want to bet where that trend is headed?

It's tough to bet against any of those. In the short term, however, politics tends to trump fundamentals. Therefore we've got:

1. Stimulus: bullish
2. Technical Picture: decade-old resistance (bearish) but long term upward momentum (bullish): overall we see the technical picture as more bearish, only because momentum is typically strong when indexes hit all time highs.
3. Politics-Both EU turmoil and US sequestration: bearish but unpredictable.

I wish I could provide a more definitive overall bullish or bearish outlook, but the evidence, as typical, is equivocal.

Whether or not you approve of central bank stimulus for the common good, there's little doubt it's bad news for the value of anything denominated in the currencies under threat of debasement, which happen to be the ones that are most widely held, the USD, EUR, JPY and GBP.

They say you can't fight the central banks, but here's a chance to strike a small blow that would help get investors dumping their cheapened currencies in favor of those backed my more conservative central banks.

For that to happen, more investors need to learn about ways to diversify into better currencies and assets linked them, simpler, safer ways than generally found in guides on currency or foreign investing.

First, if you haven't done so already, see here (North America) or here (outside of North America) for information about the most up to date guide on a wide range of conservative strategies to diversify into the currencies most likely to hold their value, and the assets linked to them. You can find a topic summary, reviews, and even read huge chunks of the book.

Second, please take a moment (about 120 seconds, actually) and cast your vote for "The Sensible Guide to Forex" in FXstreet.com's Awards 2013 in BEST NEW BOOK category. The link to the survey is here.

A win might help draw some additional attention, and help others hear about how they can be liberated from the ongoing financial repression.

Thanks in advance for your help.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The ongoing deadlock hit Western stock indexes this week, including the bellwether S&P 500, as discussed here. This political paralysis also suggests another coming threat to risk currency pairs like the EURUSD. In the coming weeks Washington must once again either raise the debt ceiling or cut debt.

The ongoing political dysfunction suggests that Washington's credibility, and credit rating, could suffer as much damage as it did during the prior debt ceiling battle in the summer of 2011. That one cost the US its AAA credit rating from the S&P and took the S&P 500 index down almost to almost 400 points below its current level.

The coming week brings a batch of EU and US data, as discussed here. The overall tone of data has not been good, and so is more likely to favor risk aversion and the USD. Until the fiscal cliff, and coming US debt ceiling battle are resolved without major US austerity, the economic calendar is unlikely to produce anything positive enough to keep the pair moving past upcoming resistance discussed below.

The weekly EURUSD chart below continues to show upward momentum in recent weeks.

EURUSD WEEKLY CHART

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

04 DEC 30 0428

Signs of continued upward momentum include:

• The pair remains firmly in its upper Bollinger band buy zone bounded by the upper orange and green Bollinger bands

• The 10 week EMA (blue) and 20 week EMA (yellow) are both close to crossing above the 50 week EMA (red)

So why do I see the overall technical picture as mixed?

Approaching strong resistance from the 200 week EMA between 1.33 and 1.34 (granted, there is still over 100 pips of headroom, enough room for short term longs, though).

The S&P 500, our preferred risk appetite barometer, has turned lower, creating a negative divergence. The EURUSD's rally since the middle of November has been in sync with risk appetite as represented by the S&P 500. We don't think the pair can sustain a rally while the index is falling.

Market calm on the fiscal cliff is starting to unravel. Until we have a deal, particularly one that defers most of the fiscal cliff's austerity, it's unlikely that the pair can overcome the approaching resistance. Given its recent strong run higher, the pair is due for a break until it gets some help from US fiscal cliff news.

Given that major risk barometers like the S&P 500 still near long term highs, already pricing in a US fiscal cliff deal and quiet in the EU, any resolution of the fiscal cliff and debt ceiling may well yield little more than a brief relief rally, if not a sell-the-news pullback.

With global economic growth expected to be weak for at least the first half of 2013 and no real repair of the EU debt situation, what's left to drive the pair much higher?

Oh, right, yet more stimulus, debt, and money printing.

As long term stores of value, neither the EUR or USD inspires great confidence given that both the Fed and ECB are committed to open ended money printing. That means these currencies will depreciate relative to better managed currencies and hard assets, especially as the global economy recovers.

If most of your assets are denominated in the EUR, USD, JPY, or other currency subject to similar central bank policies, you need to diversify your currency exposure just as you would diversify by asset class and sector.

There are currency diversification solutions to fit most needs. The problem for most people has been finding them. Specifically:

• Most forex guides focus on trading styles that are too risky and demanding for most people.
• Most foreign investing guides focus on the fundamentals of a given recommended asset without giving enough consideration to the currency to which they're linked.

I've tried to provide a variety of solutions that avoid these problems in my book, The Sensible Guide To Forex (Wiley & Sons, 2012). See here or here for details.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.