So as traders all around the globe watch their bottom lines bottom out and their hedge funds blow-up, I’m flat-out loving this market.

Why? I have a secret weapon that lets me profit when markets are sinking, while my stock trading buddies can barely stay afloat with their stocks.

What’s that secret weapon? The Japanese yen. You see, when volatility increases in the markets and stock traders lose their shirts, their loss is my gain. The Japanese yen experiences an uptrend when almost every other asset class (even commodities) is headed downhill.

At times like these, I can pair the yen with almost any currency in the foreign-exchange market and I’ll win. I know the yen thrives off of volatility, so one of my buddies’ strongest tools works even better for me during bear markets.

Stock traders all over the country look to the VIX (Volatility Index) to gauge when the stock market may bottom. They wait until the VIX rises to an extreme level and then they go in and buy. However, I watch the VIX heading higher and I know it’s giving my yen trades another boost.

Then when the VIX appears to peak, and these stock traders are just beginning to make some headway in their trades; all I have to do is reverse my yen trade and I’m still making a killing the whole time. If they only knew it was so easy…

Take a look at the VIX in the chart below, and the Japanese yen price right above it. When the VIX hits extreme levels (above 30 but especially around 35 or higher), the yen starts to peak. At that time, I just reverse my trade and start shorting the yen.

The VIX and the Yen…Traveling Buddies!

As a currency trader, you can buy or short the yen based on what you see using the VIX, their so-called “stock tool.” If you’re a stock trader and you understand the VIX, then you also understand the yen whether you know it or not.

As you can see above, the yen’s run may be almost over because the VIX is showing an extreme reading (i.e. it’s soaring higher). So it may be time to reverse your Japanese yen trades.

Secret Weapon #2: Collect Daily “Dividends” from the Currency Market

But there’s one secret that would REALLY push my stock buddies over the edge if they knew about it. It’s one I use in “up” markets, when stocks are also doing well

Most traders know the S&P 500 hasn’t gone anywhere for a number of years. However, once you take into account these companies’ dividends, then you could have an overall gain even while stocks stay flat.
However, these stocks only pay out dividends on a quarterly basis, while currencies pay out interest on a daily basis. Yes, you read that right…

It’s like getting a dividend daily.

So I have 365 opportunities a year to profit, while my stock buddies get four. If they only knew…

Secret Weapon #3: No Commissions, So There’s Less Fees in Currencies

The third advantage I have over stock traders is my stock buddies have to pay a spread AND a commission for each stock trade, while I ONLY have to pay the spread.

And I pay a smaller spread than they do because I control more currency with less money down and because the currency market has more volume which leads to tighter spreads.

So while my stock buddies are trading in this bear market, losing money on their positions AND paying commissions along the way, I’m earning profits now and paying less in fees.

Let’s say my stock trading buddies and I place the same number of trades each year. My stock buddies pay a measly US$7 per trade (even though many firms charge more). If we both made only 10 trades each month, we’d both have 120 trades over the course of a year.

Now remember that stock traders are charged twice on each trade (when they buy and when they sell). So over the course of the year, my buddies must pay 240 different commissions, costing US$7 each. That’s US$1,680 in commissions. That doesn’t even count how much they also pay in spreads.

What do I pay in commissions for completing those same 120 trades? Nothing! I only pay my much smaller spread all year long.

My stock buddies have to earn that much more in profits before they even break even. So obviously, the deck is stacked in my favor. If they only knew…

You now know my three secret weapons that give me an edge in the currency markets.

Once you add currency plays to your portfolio, you’ll quickly discover currencies have an advantage over several other markets. For starters, currencies can produce large gains in a relatively short amount of time, unlike bonds. Also, certain currencies perform well during both recessionary and recovery periods, as I mentioned.

In fact, we can be smack dab in the middle of a recession and certain currencies will still perform well. Don’t believe me? Look at the markets right now.

Usually the savvy investors switch to commodities when stocks are falling. Earlier this year, commodity investors made a killing when they dropped their stocks for long-term commodities. However, those same investors got slaughtered two months ago when commodities plummeted. As those investors learned, there are times in the economic cycle when BOTH stocks AND commodities are going down - and we’re in that time RIGHT NOW!

So what’s left? How do you buffer the volatility and help diminish draw downs to your portfolio in times like these? You buy the currencies that perform well during bear markets or more specifically low-yielding currencies like the Japanese yen and Swiss franc.

Remember: Since currencies are always traded in pairs, you just have to look to the currencies that might not have seemed worthwhile during times of growth and expansion. Currencies like the yen - whose low interest rates encourage institutions to borrow it - and the Swiss franc are excellent ideas in markets like this one

So much for “decoupling”…

The theory that emerging markets could decouple from U.S. financial turmoil has officially been culled. The index is now in the middle of its worst draw-down since 2002. A major part of the index including Korea, Russia, Taiwan, China, and Brazil is in a complete freefall.

Emerging markets have not escaped the global financial turmoil paralyzing stock and debt markets over the last 13 months. In 2008, the MSCI Emerging Markets Index has plunged 28%. That’s worse than the 20% decline logged by its sister index for the industrialized economies, the MSCI World Index.

Two key markets in the MSCI Emerging Markets Index have been pummeled over the last 60 days: South Korea and Russia. South Korea has dropped 13%, while Russia is down 10%. These two commodity giants are worth a combined 23% of the index, so they both have added to the sectors’ woes this year.

South Korea has won the booby prize for the worst performing currency in Asia this year. The country is down 19.4% versus the resurgent dollar. Last week the South Korean won sank to its lowest levels against the dollar in four years. The won sank despite government intervention to support the currency. Meanwhile, Korean shares have tanked 26% this year.

In Russia, global investors have dumped stocks in Moscow en masse over the last 30 days following its invasion of Georgia. The Moscow RTS Index, loaded with natural resource stocks, has crashed 36% in 2008. The ruble is also weakening against major currencies, despite Russia’s US$500 billion war chest of foreign-exchange reserves.

Other emerging markets are also declining sharply in 2008. Chinese stocks have crashed almost 60% this year followed by a 44% loss in India. The BRICs, or popular emerging market countries, that include Brazil, Russia, India and China, have collapsed 33% in 2008.

But do the emerging markets deserve this sort of valuation?

Emerging markets continue to sport far superior economic fundamentals than the major markets. Banks in the sector don’t have questionable balance sheets like those in the West. These banks have loads of free cash and will probably continue acquiring distressed American and European financial assets.

For the most part, emerging markets in Asia, including Russia, already went through a major economic crisis 10 years ago.

Boosted greatly by a bull market in raw materials since 2002, these countries are still home to almost US$3 trillion worth of reserves and high savings rates.

If oil and food prices continue to decline this fall, then you can make a strong case for buying this asset class again. Once inflation lowers and interest rates stabilize, we’ll see bullish developments in this region again. But before this can happen, U.S. asset markets must stabilize.

The dollar has gained against global currencies since August 8, when Germany’s mighty economy contracted in the second quarter, triggering one of the biggest dollar rallies in years.

And maybe it was time for a rally. Since peaking more than six years ago versus the world’s major currencies, the U.S. dollar has posted some dizzying declines. Only a few currencies in the world have actually declined in value against the sad buck since late 2001…one of which being the Zimbabwe dollar.

But this current bout of dollar strength has more to do with the surprising weakness of other foreign economies than a resumption of U.S. growth. We’re simply ahead of the curve.

The market views the dollar as a leading currency as other economies begin to grapple with an economic slowdown or, in some cases, recession. The United States has already gone through the process of priming the economy with interest rate cuts and fiscal measures to boost consumption, driving the dollar lower in the process. Now it’s the turn of the Europeans and Japanese. They are only now starting to enter slowdowns in their economic cycles.

That means they’ll be cutting rates, so their currencies will weaken. And the value of their assets – in dollar terms – will decline.

Therefore, savvy investors in the next few months will look to build positions in some of the U.S. economy’s most beaten-down, oversold assets. Specifically, foreign and U.S. investors alike can find significant value and opportunity in distressed U.S. debt, real estate and stocks.

From its high in early July the benchmark Reuters-CRB Index has declined 19% while crude oil prices have tanked 23%. Other commodities have declined even more.

Oil stocks, as measured by the Spiders XLE Index (XLE) are down 22.5% from their highs while the Dow Jones Oil Equipment and Services Index is off 21% from its best level.

Commodities, including oil, are in a correction. But don’t be mistaken: We’re definitely not at the cusp of a bear market for oil or commodities.

The market is right to discount a slowing global economy this year as credit problems and stagflation spread to overseas economies. It’s wrong to assume that the bull market in oil and most other commodities is over. Short-term cash rates still below the rate of inflation and global money-supply is still growing in excess of almost 20% year over year, according to Grant’s Interest Rate Observer.

In its fight to control deflation in housing and bank credit, the Federal Reserve will continue to pump the financial system with more money. Massive government bailouts don’t come cheap. Over time, inflation, which is now moderating, will make a comeback.

And what about the dollar?

Just because the dollar is soaring doesn’t imply that trend will last, either. The Fed is not going to hike lending rates for at least another 12 months and foreign central banks won’t start cutting rates until inflation eases.

The dollar may be in a bear market rally now, but the buck simply doesn’t have interest rate support from the Fed. Plus, the economy remains mired in a severe slowdown or recession across several important industries.

At the very least I expect the rate of dollar appreciation to slow over the next few weeks as profit-taking arrives and more signs of credit contraction plague the domestic economy. If anything, I’m expecting the Fed to cut, not raise, interest rates in 2009. That won’t be bullish for the dollar.

Tune in tomorrow, and I’ll tell you how to take advantage of this dollar strength and short-term oil correction.

A Bearish Crystal Ball:
The Index That Predicted the Bear Market Has Not Peaked Yet

 Index measures buying and selling volume trends. And so far, this index has not peaked. This index was correct in identifying weak buy-side volume as early as last August and warned a bear market was in the cards.

On days the stock market posts a big advance, like yesterday, investors are not aggressively accumulating equities. In fact, they are still selling. Lowry’s tells me that the point of maximum selling has not arrived.

Finally, and most importantly, the state of the credit markets is not improving.

Some segments are rallying, including the LBO market or leveraged loans. But most deals are not clearing and banks still have a massive back-log of paper they can’t sell.

Furthermore, banks are reluctant to lend. Their battle-scarred balance-sheets are committed to rebuilding equity. Banks are struggling. Capital is scarce. Lending volume has fallen off a cliff since last fall and it’s not improving. LIBOR rates remain elevated, junk bonds are still declining in value as default rates rise and most credit indexes are at all-time lows, meaning stress is at extreme levels.