Currently, the market is in a correction, and last week it began to inflict some pain on some players. But I have peace of mind because I’ve been here before.

I note the headlines about job losses, the health care bill, pollution controls, GMAC’s cash shortage, the H1N1 flu and the corresponding vaccine shortage, our national debt, the continuing credit crunch, the weak dollar (until last week), Barack Obama’s falling approval ratings and the continuing trouble in Afghanistan, Iran, Iraq and–of course–Israel.

I have two main thoughts on Thursday's market.

The first is that the bull market is healthy as a horse, and it will remain healthy until enough people stop arguing with it, questioning it and simply denying it.

Today I want to focus on the possibilities for change in our enormous electric power grid, an animal that is so complex–and so rooted in ancient technologies–that it is rife with inefficiencies. To me, this spells opportunity.

We all know how the grid works in general. All across the country, power plants burn coal or oil or natural gas or combinations of the three. Others burn wood, or generate nuclear power, or use hydropower, or take in trickles of power from little wind power farms and solar panels. And all across the country, people like you and me go around flicking switches off and on whenever we want something … light, heat, dinner, communications, clean clothes, entertainment, etc., pretty much without regard to the effect our actions will have on the grid as a whole. And because electricity can’t be easily stored, the power companies have to continually adjust their inputs to meet our demands.

I’m not sure who coined the phrase “Romance Stock.” It might have been my father; it might have been someone earlier. In any event, it’s a phrase we’ve long found useful at Cabot, because it provides a model that helps us understand how stocks behave.

To understand the model, you’ve first got to understand that what makes stocks move isn’t revenues or earnings or anything you can measure. It’s simply the change in investors’ perception of the future.

My favorite automotive investment today is a company in the component business that I mentioned here briefly two weeks ago. Its name is Maxwell Technologies (MXWL), and its products are ultracapacitors that use static electricity to store and release electrical energy and do it much more quickly than batteries ever can. These ultracapacitors are used today in a variety of industries, including telecom and aerospace, but their biggest potential lies in the automotive market, which is rapidly turning to hybrid and electric vehicles that can make great use of the technology; in fact, they’re already being used in buses in China. The company is not yet profitable, but analysts are predicting profits for 2010. In the second quarter, revenues grew 30% to $24.8 million, while the loss per share shrank to six cents.

As for the stock, it hit 15 in late July, and has been digesting that gain since, building a base around 13. Selling volume has been minimal, suggesting that the action is dominated by institutional position-building and not distribution.

Not long ago, I was having a discussion with some friends about real estate when the focus drifted to Cape Cod housing prices, which had plunged in the 2007-2008 real estate collapse. The consensus among the group was that prices would eventually rebound, and that patient owners and investors would come out OK. And that was no surprise. Most people tend to extrapolate the future from the past … and for most of our lives, real estate prices have gone up.

Then up piped my brother-in-law the geologist, commenting, “10,000 years ago Cape Cod wasn’t there and in 10,000 years it’ll be gone again.”

My stock idea today takes its cue from water. Good old H2O. Water is a daily requirement of all living things, and the earth has a limited supply. So as the world’s population increases, proper management of water resources becomes increasingly critical. And where are both the population and the use of water increasing especially fast? China.

So my idea today is a very young stock, which came public on June 24 and just earned a spot in Cabot Top Ten Report. It’s Duoyuan Global Water (DGW), and here’s what editor Michael Cintolo wrote:

Last week, the market told us that investors in medical stocks are afraid that Obama will pull the rug out from under stocks in an attempt to reduce the country’s health care bills. They’re dropping some of these stocks–especially drug stocks and medical device stocks–just like they were dropping financial stocks a year ago.

But there is one sub-sector of medical stocks that’s still attractive, and that’s the companies that are expected to help rein in those medical costs in the future.

Intel (INTC) was once a superb investment. If you had bought $10,000 of INTC at the end of 1974, the year Craig Barrett joined the company (three years after the IPO) you would have had about $18.5 million at the stock’s peak in 2000 … or nearly $4 million today.

But Intel’s glory days are gone; your job today is to find the next Intel.

I noticed the following headline last week:

“Virgin Atlantic boss warns no airlines will make money this year.”

We’re all familiar with the story about the frog. If you drop him in boiling water, he’ll jump right out. But if you put him in cold water and then heat it to boiling, he’ll adjust gradually to the increasing temperature, be lulled into inaction, and die.

It’s not true; the frog will eventually jump out. But as a cautionary tale, it reminds us that we should be wary of inaction in response to gradual changes in our environment. In other words, as change happens–and it happens every day–you must adapt. If not, you’ll fail to thrive … and you might die.

Back on May 7, soon after General Motors (GM) announced that it had lost $6 billion in the first quarter, I wrote the following in Cabot Wealth Advisory:

There is, however, one auto stock that’s intriguing. It’s Tata Motors (TTM) of India, with $9 billion in revenues over the past 12 months. Tata acquired Jaguar last June, and we were impressed to read early this year that the top marques in the J.D. Power quality rankings were Jaguar and Buick. And now Tata’s come out with the $2,500 Nano, a car designed for the masses of India that has the potential to succeed like the original “people’s car,” the Volkswagen Beetle. Tata has already received 203,000 orders, including deposits of – brace yourself –77% of the selling price. The first cars will be available in July. And Tata pays a dividend of 4.5%.

Putting on our investment hat, let’s look at United Parcel Service (UPS) and FedEx (FDX) and then at a potential competitor from the digital universe.

United Parcel Service, headquartered in Atlanta, is the big dog. With annual revenues of $51 billion, it’s already two-thirds the size of the USPS. Its bread-and-butter is packages, representing 62% of revenues. International packages account for 21%, and supply chain logistics and freight make the rest.

Today's first topic is Steve Jobs, Apple and AAPL.

Steve Jobs, of course, is the man at the head of the company. Apple is the company itself. And AAPL is the stock.

Last week I received the following email.

"Dear Mr. Lutts, My name is Joe C. I am 25 years old and come from Cork in Ireland. I am currently studying and have one year left in my business degree. I find your optimism in these "depressing" financial times refreshing. Would you agree that the most lucrative time for an astute investor may be in times of recession? I understand you are a very busy man and probably will not have time to reply to this email. To finish I am a believer that the international community can talk themselves into recession with only doom and gloom on the horizon. To see a company like yours giving sound, astute investment advice is great."