What do you get when you combine fears about a slowdown in Asia with an economic recovery that is “more modest” than anticipated? The answer is a big sell-off in equity markets around the globe. Indeed, the one-two punch thrown at equities this week started with the Federal Reserve’s acknowledgement that the nascent economic recovery, as the Federal Open Market Committee said Tuesday, “has slowed in recent months.”

The Fed also said that the pace of recovery going forward is “likely to be more modest in the near term than had been anticipated.” The translation here is that things are going to be tough economically throughout the rest of 2010 and likely into 2011, and that’s not what traders wanted to hear.

The second blow to stocks that knocked them for a loop in Wednesday trade was the weak economic data from Japan and China (more on China in the next section). When things are slowing down in the United States, the smart money looks for signs of growth in international markets. Lately, the strongest international markets can be found in Asia. Unfortunately, the data out of Asia left a decidedly bearish taste in traders’ mouths.

As you can see by the chart of the S&P 500 Index, stocks now have fallen below the technically significant 200-day moving average (red line). Wednesday’s big sell-off even pushed the S&P 500 close to its 50-day moving average (blue line).

The weakness in this market, particularly after such strong buying since early July, stresses that you need to have stop losses in place in all of your invested positions. With economic weakness wafting in both the domestic and international clouds, and with fearful traders on edge and ready to lock in recent gains, the bias right now is definitely in the sellers’ camp.

Now, one sector that’s benefitting from the bearish attitude in both domestic and international equities is the U.S. dollar. The value of the dollar, as seen here via the PowerShares DB US Dollar Index Bullish ETF (UUP), has surged this week. The fund now trades above its 200-day moving average.

I think UUP is an effective hedge against potential weakness in both the domestic and international equity markets. It’s also a way to profit from the announced move by the Federal Reserve to begin reinvesting the proceeds of maturing mortgages in U.S. Treasury debt.

Right now, my Successful Investing advisory service has a hedge-oriented allocation to the rising dollar. We also have exposure to investment-grade bonds, and both domestic and international equities. Of course, we have an exit strategy on each of these positions designed to keep us out of trouble if any of these respective sectors turn decidedly south.

If you’d like to find out how exactly how we’ve allocated to this volatile market -- and how the Fabian Plan’s safety net works -- then please check out Successful Investing now.