Stimulus Physics Update #2

On February 8th, I joked that the stock market might be using cartoon physics to propel itself higher. Here is the chart that I offered. You will note that the peak appeared to be 11,000.



This was the glimpse of where we were on March 25th.



This is where we are now. The blue dot represents Friday's close.



We've managed to somehow resume our original trajectory as seen in the first chart. Cartoon physics for the win!

I am still mostly joking. I want to make that clear. I just find it amusing that the joke has become a running gag.

Even if I was arrogant enough to suggest that these charts can predict the future, then I'd still be the last to argue that the ride down would be nearly as smooth as the ride up. That's where the cartoon part of the physics comes in. Things generally drop straight down in the cartoons.



I would also like to point out a reason why we could be on this path. We saw explosive velocity in stock prices from the bottom and as seen in the charts that upward velocity continues to slow. At some point we risk rolling over and beginning our descent.

Think of stimulus as the baseball bat and stocks as the baseball. The stimulus was applied once using shock and awe. Stocks are now in flight. The bulls are calling it a home run. What would it matter? Even balls hit out of the park eventually come back down to earth.

2nd order polynomials, such as the trend lines in the charts, do an excellent job of describing the path of a baseball once it is hit. The reason is that the path of a baseball is a 2nd order polynomial (if air friction is not considered). 2nd order polynomials could therefore, at least in theory, also describe the path of stocks once they are hit.

What will happen if more stimulus is not applied? What would happen if gravity brings us back down to earth? We may find out soon.

April 21, 2010
States likely to cut schools when stimulus ends-S&P

WASHINGTON, April 21 (Reuters) - The ending of the economic stimulus plan this year will rip away funds crucial to helping U.S. states survive the recession and they will likely start to cut spending on education, Standard & Poor's Ratings Services said on Wednesday.

April 30, 2010
NPR: Foreclosure Woes Loom As Housing Stimulus Ends

Friday marks the last day that homebuyers can qualify for an $8,000 federal tax credit. The government has been trying to rescue the housing market from collapse. But now it's taking away most of that life support.

May 3, 2010
Report: Stimulus boosts construction spending

“With no transportation bill, no aviation legislation and no water trust fund, the only thing waiting for this industry after the stimulus is a funding cliff,” AGCA President Stephen Sandherr said in a news release. “If things don’t change soon, all the stimulus will have been was a really expensive way to delay hardships and layoffs for thousands of construction workers.”

This is not investment advice. It is simply cartoon physics applied to the stock market. I can say that as of November 9, 2009, I'm deflationary. Oil prices are roughly 10% lower than they were then. I therefore see no reason to change my mind now.

And lastly, I am not making any sort of bet on these theories. I'm not in the stock market but I'm not shorting the stock market either. I'm simply watching from the sidelines while sitting in inflation protected TIPS and inflation protected I-Bonds. Why the inflation protection if I'm deflationary? Same reason I have fire insurance on my home. Things happen and the penalty for being wrong on this is not worth the risk to me.

See Also:
Stimulus Physics
Stimulus Physics Update #1
Trend Line Disclaimer

Source Data:
Yahoo: Historical Prices for Dow Jones Industrial Average