How the Weather is Like the Stock Market

How the Weather is like the Stock Market

A Strong Indian Stock

In New England, it’s fashionable to take weather forecasts with a grain of salt. Weather forecasters have a reputation for putting an extreme spin on the weather threat of the moment. I’m sure they understand that a little sensationalism can turn a possible atmospheric event into a topic of conversation, and that’s good for their ratings.

Right now, however, it seems that the weather forecasters are having a hard time sensationalizing the storm that’s heading our way.

One arm of this storm stretches from Delaware across Connecticut, Rhode Island and Cape Cod and out to sea. Another runs from Kentucky up to the middle of upstate New York. Then there’s a follow-up storm running from western Kentucky to the top of Wisconsin.

As a jaded Yankee, I’m used to the weatherman telling me to stay off the streets and dress warmly and blah, blah, blah. When that translates into actual weather, it usually means that I have to zip up my coat, maybe remember to take a hat.

But this time, the chorus of admonitory meteorologists is using the word “historic” to describe the approaching storm and they’re throwing around numbers like “two or three feet” of snow.

So, they have my attention. And because I have an App on my iPad that lets me watch in real time as weather radar outlines the size, shape and speed of the coming storm, I’m taking it very seriously. My wife has stocked up on supplies and most of Cabot’s staff (including me) are working from home while we wait to see what the storm delivers.

I see definite parallels between warnings about this kind of Big Weather and the shocking headlines that appear constantly about the impending meltdown of the stock market or the U.S. economy or some other big scary topic that investors are interested in.

And I see similar parallels in the correct way to handle these warnings.

I have three rules for how to interpret and react to any kind of sensational prediction. I hope they will help you to put things in perspective and avoid unnecessary anxiety.

First, whether it’s a predicted catastrophe in the market or the weather, ask yourself: “What’s the motivation of the person giving the warning?” If someone is yelling a dire prediction at me about something that’s supposed to happen in the stock market, I can be pretty sure that person wants to sell me something. And that puts my guard up.

I’m pretty well satisfied that the weathermen are trying to keep me off the roads and save my life.

But the catastrophe shouters on the Internet usually have an expensive report they want to sell me. And the predictions are aimed more at selling that report than actually saving me money.

So, my rule is to look at the motivation of the person doing the warning.

Second, I make darned sure that I know what’s actually going on in both the markets and the weather. There are some measures of volatility and anxiety and a few tipoffs in certain market statistics that can give you a heads-up that a big move is on the way.

Unfortunately, there’s no equivalent of the kind of real-time radar that will show you what’s heading your way like the images the Internet will show you for the weather.

That means that the only thing you can know for sure is what the market is doing right now. And that’s an extremely valuable piece of knowledge.  

Third, I ask myself if I’m really prepared for anything the market (or the weather) might throw at me. If the forecast is rain, I’ll take an umbrella even if the sun is shining.

In the investment world, I prepare by keeping an eye on what the market is actually doing. I know whether the markets are trending up, down or just dithering in place. And I have mental stops computed on all my holdings.

I know that I can sell my holdings very quickly, if need be, and that—not some pre-emptive action—is my main defense against the kinds of disasters salesmen are forecasting.

Since I can’t know what will happen, I have to content myself with knowing what I will do in each possible case.

So, when you’re playing your round of golf or taking your walk in your light jacket, please spare a thought for those of us sitting here helpless while a “historic” snowstorm tries to turn New England into a trackless waste of white. We’ll see how the predictions play out.

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My stock pick today is one that should have shown up on your radar if you’re on the lookout for emerging markets stocks in very strong uptrends.

It’s HDFC Bank (HDB), one of the largest private banks in India. The bank is huge, with over 3,400 branches and 11,000 ATMs in nearly 2,200 cities and towns across India. Its customer base expanded by 3,000,000 in 2014 as India’s economy gathers strength.

The economy of India is of special interest to economists right now because the country’s Prime Minister Narendra Modi, is considered to be very pro-business. Plus, his party has working majorities in both houses of the Indian legislature.

Many investors feel that India is at a turning point, where a modest push toward development of the country’s infrastructure will yield outsized results in economic development.

HDFC Bank, with exposure to retail through credit and debit cards, to wider ownership of automobiles through auto loans and to increasing real estate sales through mortgages, is ideally situated to reap the advantages of India’s growth.

One look at the chart for HDB will likely convince you that something significant is going on. HDB enjoyed good performance during much of 2014, but was in a volatile consolidation during the last few months of the year. But starting on January 15, the stock began to explode higher. In the last seven trading days, the stock has run from 51 to 62 on big volume.

An investment in HDB on any reasonable pullback will likely pay dividends. But if you’re really interested in getting the most out of the economic development of India (and all other emerging market), you should consider taking a subscription to Cabot China & Emerging Markets Report, which I write. The Report will clue you in to all the news and the strongest stocks around the developing world. And it will stick with them, advising you on how to buy and when to sell. I think you’ll like it. 


Paul Goodwin

Chief Analyst, Cabot China & Emerging Markets Report

and Editor of Cabot Wealth Advisory


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