Recent gains are based on speculation that stagflation is about to begin.

A rally in commodities that started late Thursday continued overnight in both Asia and Europe, helping boost European markets and early trading in U.S. equities as well. As of 7AM EST the Dow Jones Industrial Average futures were up 0.3%.

Oil futures were up more than 1% to $73.26 a barrel while gold futures were up 0.7% to $953.60. Futures for copper were up 3.6% in early market action. The cause of recent commodity price increases has been weakness in the U.S. dollar due to record deficit spending.

Market forces August 28

It is time to be cautious. Asian markets were mixed last night. Communist China down -2.9%, Japan up 0.6%. The Yen climbed on worries that rally has overtaken recovery. China is beginning to realize many of their companies are insolvent and that they need to be shut down. This will be their first reality check and their market could drop 60% to 80% as happened in Russia when they had their first reality check in the 1990's.

European markets are currently up 1% to +1.4% this morning where rising commodity prices and good bank interest spreads provide the gains.

US market futures were moving slightly higher at 7AM EST to about 0.3% before the opening today.

The speculation that caused the run-up in copper, oil, and energy was based on the hope that China's infrastructure buildup would sustain demand. But China has many start-up companies that are failing and the government is unable to privatize thus far because they want to keep control of any successful companies. Privatizing cannot be successful then the Chinese only allow failing companies to privatize.

Our strategy now is to continue to invest in stocks in sectors typically when they are out of favor and to take profits that exceed 5% in a wk and 10% within a month. Profits that high and fast are not sustainable in a recession. As markets recover it is necessary to estimate the potential stock price appreciation level. Typically we are now seeing a 5% to 10% rise relative to previous highs and then a rapid fall back as hedge funds unload shares near the price highs. Then near the previous lows the hedge funds get back in causing an initial spike upward. Then Jim Cramer and others tell investors to get back into the stock and the cycle repeats itself. The funds tend to eventually run up a favorable sector until it is well over valued and then when hedge funds bail out they often switch to an undervalued sector. Recently they have rotated frequently between cyclicals (low-end retail stores and food), technology, financials, and commodities.