A Better Way to Judge Threats on the Market

global tension

North Korea is still causing quite a bit of angst. The front page of the Financial Times reports:

Donald Trump has lashed out after North Korea’s latest nuclear weapons test, declaring the nation’s actions as “hostile and dangerous” to the US and leaving open the possibility of a military response against Pyongyang. 

North Korea on Sunday said it had tested a hydrogen bomb capable of being mounted on a ballistic missile that was a “perfect success”. The test, estimated to have been about 10 times more powerful than previous detonations, triggered a magnitude 6.3 earthquake.

Sounds pretty bad, right?

Look, it’s easy to get freaked out by this sort of stuff. For many, the inclination is to protect your capital by moving to more conservative investments or cash.

But most of the time, our inclinations are wrong. Our brains make us do things that feel good in the short term, but are bad in the long term.

To avoid these damaging impulses, I have a little strategy you can employ. It’s easy to do, and quickly puts things into perspective.

If you’re worried about similar threats, it’s always good to see what everyone else is doing. Are you worrying needlessly? Or is the herd starting to worry, too?

In the case of North Korea, why not take a look at what’s going on in the region? After all, if things really are bad and war is a genuine risk, it would probably show up in the South Korean and Chinese markets first, right?

OK then, let’s take a look at the South Korean stock market, the Seoul Composite index. As you can see, the market has been strong this year. It’s corrected in the past few months on the back of North Korean tensions. But after such a strong run, a pullback like this is not unusual.

Seoul Composite Index 2015 - 2017
Source: Optuma
[Click to open new window]

What about China? The Shanghai Composite index (below) just broke out to its highest level since January 2016. That’s bullish. There is clearly no concern about North Korea on the value of Chinese stocks.

Shanghai Composite Index 2015 - 2017
Source: Optuma
[Click to open new window]

I’d much rather take my cues from the markets than from the mouth of Donald Trump — or anyone else with an opinion on the matter. Our brains are wired to look for threats. In the stock market, there are perceived threats everywhere.

But you have to control your urge to respond to each one. I believe by studying the charts (of individual stocks or markets as a whole) you can put things into perspective more easily, and make better decisions.

Let me give you an example of how this recently worked for me. I was looking into the junior oil and gas sector in Australia. The sector has been through a big bear market. I was trying to separate the wheat from the chaff, so to speak, and pick a few players that had the chance to deliver big gains.

I was comparing two companies, both with current drilling programs underway. The company I favoured was a slightly better value play. But what got me over the line was that its chart looked stronger.

In other words, the collective intelligence of the investors in the stock I choose told me that it had a good chance of going higher. You could see this through the shape of the chart. And when the fundamentals of the business aligned with what the chart was saying, it was enough for me to recommend the stock.

Within a few weeks of that recommendation, the stock is up 50%, while the stock that I passed on hasn’t moved.

That’s the power of subjugating your own views and listening to the market instead. It won’t work out all the time. But as a part of a process, it will bring you much more success than guessing based on gut feel, or worry.

By the way, it’s only just getting started for my 50% gainer and the other junior energy stocks I recently recommended. You can find out more about them here.

In the meantime, worry less about the threats of North Korea…at least until the market tells you to start worrying.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan

Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

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