Table 1 : Newtonian Physics w.r.t the stock market
Date : Mar 14th, 2009
Of course, the reverse should be true also ….. What Comes Down Must Also Go Up !
On planet Earth, where Law of Physics governs how the natural world works ….. from electro-magnetic field due to Earth’s rotation, gravity, motions, electronics …. you name it, the Law of Physics has a part in it.
Now, let’s take a look at one of the most famous Laws in Physics ……..the Newton’s Law of Motion.
On planet Earth, where Law of Physics governs how the natural world works ….. from electro-magnetic field due to Earth’s rotation, gravity, motions, electronics …. you name it, the Law of Physics has a part in it.
Now, let’s take a look at one of the most famous Laws in Physics ……..the Newton’s Law of Motion.
A simple definition as follows :
Newton's laws of motion are three physical laws that form the basis for classical mechanics, directly relating the forces acting on a body to the motion of the body. They were first compiled by Sir Isaac Newton in his work Philosophiae Naturalis Principia Mathematica, first published on July 5, 1687. Newton used them to explain and investigate the motion of many physical objects and systems.For example, in the third volume of the text, Newton showed that these laws of motion, combined with his law of universal gravitation, explained Kepler's laws of planetary motion.
1) First law
There exists a set of inertial reference frames relative to which all particles with no net force acting on them will move without change in their velocity. This law is often simplified as "A body persists its state of rest or of uniform motion unless acted upon by an external unbalanced force." Newton's first law is often referred to as the law of inertia. So in other words "every object in motion will stay in motion until acted upon by an outside force."
There exists a set of inertial reference frames relative to which all particles with no net force acting on them will move without change in their velocity. This law is often simplified as "A body persists its state of rest or of uniform motion unless acted upon by an external unbalanced force." Newton's first law is often referred to as the law of inertia. So in other words "every object in motion will stay in motion until acted upon by an outside force."
2) Second law
Observed from an inertial reference frame, the net force on a particle of constant mass is proportional to the time rate of change of its linear momentum: F = d(mv)/dt. This law is often stated as, "Force equals mass times acceleration (F = ma)": the net force on an object is equal to the mass of the object multiplied by its acceleration.
Observed from an inertial reference frame, the net force on a particle of constant mass is proportional to the time rate of change of its linear momentum: F = d(mv)/dt. This law is often stated as, "Force equals mass times acceleration (F = ma)": the net force on an object is equal to the mass of the object multiplied by its acceleration.
3) Third law
Whenever a particle A exerts a force on another particle B, B simultaneously exerts a force on A with the same magnitude in the opposite direction. The strong form of the law further postulates that these two forces act along the same line. This law is often simplified into the sentence, "To every action there is an equal and opposite reaction." Or in other words, "for every action there is an equal and opposite reaction."
Let’s see if this also applies to our stock market, the barometer of the state of economies of the country …. at least the perceived barometer for most people.
Whenever a particle A exerts a force on another particle B, B simultaneously exerts a force on A with the same magnitude in the opposite direction. The strong form of the law further postulates that these two forces act along the same line. This law is often simplified into the sentence, "To every action there is an equal and opposite reaction." Or in other words, "for every action there is an equal and opposite reaction."
Let’s see if this also applies to our stock market, the barometer of the state of economies of the country …. at least the perceived barometer for most people.
I tried applying these 3 Laws into the Dow Jones Industrial Average (DJIA) trend as illustrated in Table 1 above.
1st Law in Action :
From mid-2007 to mid-2008, with no external net force to jerk the market, the DJIA averages 13,000 pts :
... every object (the DJIA indice) in motion will stay in motion until acted upon by an outside force."
2nd Law in Action :
An external net force jerk the market in the form of the sub-prime mortgage crunch.
As we moved towards 4Q'08, more and more external net force sets in, one after another in a "tsunami-like" wave.
Giant US Corporations fells like dominoes ... Lehmans, AIG, Citigroup, Washington Mutual (WaMu), Fannie Mae, Freddie Mac .... the lists goes on (increasing the mass, 'm')
As the tsunami gathers momentum, 'a' .... the Force, F increases exponentially.
Unfortunately, the 'F' in this case is a "negative" force that represents broad panic selling.
By 1Q'09, the Dow lost 50% of its market capitalization.
3rd Law in Action :
Now, the stock market is a trading place. For trading to happen, there must be sellers & buyers, and prices are determined via the the Demand & Supply rules.
Hence, the 3rd Law : for every action (Selling) there is an equal and opposite reaction (Buying)" ... however much the sellers want to sell, there will be buyers taking them up.
There you have it .....the stock market also behaves like any other natural forces of the Earth. It conforms to the Law of Physics. Now, the trillion $ question is ..... who are these people/institutions that are buying up in the current extreme bearish sentiments ? ...and why are they doing it ?
A hidden lesson to be learnt here ?
Remember ... What Comes Down Must Also Go Up ! .... if you truly believe in the 3 Laws of Motion.
I was joking with a colleague the other day. He is a Planning guy and naturally, he's concerned with production outputs. Recalling this, I laughed when he coined the term "What Goes In Must Come Out".
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