Its days like this I’m glad I’m not strictly a stock investor.

While the guys on Wall Street are cheering over the 60% gain since March, and better-than-expected earnings at Abercrombie & Fitch and Disney…

…there’s a much darker truth lurking in the markets.

First of all, if you adjust for inflation, the Dow is down 30% from its peak in 2007. And yes that’s including this year’s rally.

But we have even bigger problems on the horizon. I see a major correction coming in as we head into 2010. (More on why in a moment…)

That’s one reason why I recently had my dad turn his stock portfolio to cash.

So far, we’ve dodged EVERY recession and bear market over the last 12 years with his 401k. His 401k is also worth 10 times what it was a dozen years ago. If I weren’t his only son…I’d surely be his favorite son.

But in the currency world, as stocks take a beating, there are two main countries that will make huge moves. One looks to plummet while the other skyrockets.

Today I’ll introduce you to both, so you can make a killing off the next stock market correction. But first let’s look at the three reasons why stocks are about to fall…

Why It’s About to Get Ugly Again!

1. Great stock expectations are now built on nothing.

Right now, the markets are fooling some investors. The average investor hears some company is beating the analysts’ expectations and wants to buy that stock.

However, there’s much more to sustaining a rally than just “beating analyst’s expectations.”

The hard truth is these underlying companies are still suffering. It’s like sending your kid to school where he continually fails the tests. So his teachers decide to solve the problem by giving him easier tests.

Well, even if he passes, it doesn’t really solve anything. Your kid is still behind and doesn’t know what he should know before going on to the next grade level.

This is exactly what’s happening with stocks.

Analysts are making the tests easy so companies pass or even beat expectations with their current earnings. In fact, they’re lowering the bar so much that even a kid’s lemonade stand could almost beat the earnings.

On top of lower expectations, companies are really making the grade because they’re cutting costs and not expanding corporate profits/earnings.

Cost cutting is good, but there’s a point where you can “cost cut” yourself out of business too. Profits are the lifeblood of any business. If they don’t make a profit, they’ll eventually go out of business.

2. The problem still hasn’t been fixed. The banks aren’t lending!

Why aren’t the banks lending right now? A couple of good reasons…

Would you want to write new loans when you know the unemployment rate is still steadily rising? I wouldn’t! Even those who are employed aren’t getting raises, and some are even taking pay cuts.

With more people being unemployed, people are tapping credit cards because Americans don’t save. So with less income and more debt, banks don’t want to lend you cash to make big purchases.

Therefore they play it safe and invest their money in fairly secure interest bearing instruments. They’re settling for small yields that are in less risky investments.

Here’s another important factor that you don’t always hear discussed much. It’s not all the bank’s fault! What?! Geithner acts like it is. He says they have an “obligation to lend” but I think they have an obligation to take on realistic risks as they see fit.

After all, any bank is a business, and not an economic stimulus plan.

3. The markets aren’t functioning right!

In a healthy, normal bull market, stock volume expands and grows much higher as the uptrend continues on. This happens because more and more buyers are coming into the market.

Right now, you have declining volume as stocks are rising. That happens when you’re in a bear market rally.

Bear market rallies are usually steep and somewhat “V” shaped. The percentage gain is high as the short sellers unwind their positions.

The bear market rallies can last for longer than they realistically should, but the day of reckoning surely comes! And when it does, it’s not pretty. It does more damage on the way down than it rallied in the first place.

So let’s cut to the chase, which currency will rise and fall as stocks crash?

The Currency to Rise and Fall As Stocks Crater
(and How to Gain as Much as 340%!)

Now, normally someone would suggest shorting the EUR/USD if stocks were about to fall. And I couldn’t argue with that. After all, this pair dropped 22%, giving short-sellers a 220% profit last time stocks fell.

But why not pick a currency pair that will hand even MORE profits?

The currency pair I’m about to recommend fell 34% the last time stocks fell. That would have been a 340% return with 10:1 leverage (or 3,400% with 100:1 leverage).

As you may have guessed, it involves pairing the absolute STRONGEST currency versus the weakest and most BROKEN to increase your profit potential by at least 100%.

In this case, the strongest currency to own during a sell-off is the Japanese yen, and the weakest, broken currency is the euro.

Why? As you may know, the Japanese yen thrives on volatility. So as stocks start to fall, both normal stock investors and FX traders alike rush to this currency for protection. As a result, the Japanese yen tends to rise as stocks fall.

Meanwhile, the euro is known as the “anti-dollar.” It rises as the dollar falls and vice versa. Now everyone knows that investors tend to dump the buck as stocks rise.

Well the opposite is also true. When stocks fall, traders tend to rush for the dollar (and the yen as I just mentioned). As the dollar rises, the euro falls. So as stocks fall, the euro falls too.

So if stocks are falling, you want to short the euro, and buy the Japanese yen. In other words, you want to look at the EUR/JPY pair. This is the currency cross to short when stocks crater again!

Check out how this currency cross dropped like a rock the last time.

While Traders Think They’re Making a Bundle
with 220%, You Can Grab 340%

I believe that within the next 3-6 months, you will see stocks crash once again. It’s inevitable! If banks were lending, unemployment was shrinking and corporate profits were expanding…I’d second guess myself. But that’s just not the case. Also, 17-years experience is telling me we’re about to see a sell-off.

If you take nothing else from this article, please learn this one concept: When stocks are falling and growing in volatility, the euro drops and the dollar and Japanese yen flourish.

Get that one concept and it will save you TENS OF THOUSANDS of dollars through the years. It can also make you a monster profit off the EUR/JPY as stocks start to fall.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. Stocks may on their way lower, but as you can see there are plenty of opportunities coming hard and fast in the foreign-exchange market – particularly in currency crosses. Read on to find out why these gems are resurrecting a dying currency market.

A 17-year veteran in the financial markets, Sean Hyman has been a senior writer for FX University Daily since 2007, and a currency trader since 2001.