Newton's Third Law: DJIA Poised for Epic Rise? 19 comments
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"For every action, there is an equal and opposite reaction."
Newton's statement implies that in every interaction, there is a pair of forces acting on the two interacting systems. The size of the forces on the first system equals the size of the force on the second system. The direction of the force on the first system is opposite to the direction of the force on the second system. Forces always come in pairs - equal and opposite action-reaction force pairs.
Last September 29th the Dow Jones Index posted its biggest point-drop ever. The drop wiped out $1.2 trillion in market value with the index slumping over 777 points, in the biggest single-day point loss ever.
But almost a year later the markets are up over 50% from their 2008 lows. And there is likely a lot more room for the markets to run even higher.
If one closely analyzes Sir Isaac's third law of motion and a simple stock chart for the last year, it does not seem far fetched that the market could be poised for a very significant leg up.
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I'm trying to figure out what correlation Newton's 3rd law has with stock market forecasting.
* That there was extreme pessimism early in the year and that pessimism was reflected by index prices.
* That the markets have made an epic rise in an astoundingly short period of time (50-60% within a six month time frame)
* That there is a lot of money sitting in the market now, right now, with a substantial profit.
* That economic news, over the last several months, has been pretty good, or has been spun as being pretty good.
Now, I take from all this that if we start to hear bad news investors will want to take their profits and potential buyers will defer purchases creating a very small door that a very large pool of investors will want to walk through.
It is a recipe for a substantial sell-off.
Whenever a first body exerts a force F on a second body, the second body exerts a force −F on the first body. F and −F are equal in magnitude and opposite in direction
The Bulls and the Bears are essentialyl the manifestations of Newton's Third Law in the market. Since the opposite force -F is felt only while the implied force F is well forcing the object.
If you want to talk physics you should be looking at Hooke's Law of Elasticity. Which describes the behaviour of the extension of a spring from equilibrium and the restoring force which tends to offshoot hte equilibrium position into another direction. This would indeed indicate we may ride up for a while after last weeks bounce but the restoring force is going to just drag it back down again until equilibrium is achieved.
Of course springs are much too simplistic anyway to realistically relate to the market but its a better rough representation or application the Newton's Third Law.
I don't share your enthusiasm for the Dow, though. It think it will peak out around 11,000 + or -. The Dow was in a bubble when it hit 14,000 which is very unusual during a secular bear market - it probably won't return to those levels until after this secular bear market ends, which I don't see happening for several more years. On the other hand, the S&P and Nasdaq both still have a bit more room to run and may have been better indexes for you to use in this model.
Hope you were just kidding with this
"For every action, there is an equal and opposite reaction."
"If one closely analyzes Sir Isaac's third law of motion and a simple stock chart for the last year, it does not seem far fetched that the market could be poised for a very significant leg up"
"Newton's statement implies that in every interaction, there is a pair of forces acting on the two interacting systems. The size of the forces on the first system equals the size of the force on the second system. The direction of the force on the first system is opposite to the direction of the force on the second system. Forces always come in pairs - equal and opposite action-reaction force pairs"
On the other hand, the market is not random, either. An event only looks random to you if you don't know the reason it happened. Everything that happens in the market happens for a reason. When all the millions of reasons are toted up, you get market moves.
An analogy to poker is apt. To the absolute newbie, poker is completely random...you either get good cards or you don't. But as poker players gain experience, they realize that there is skill involved. A fair poker player might say it's 30% skill and 70% luck. But as you move up the ladder, skill takes on more and more of a role. At the highest level, some poker players say that luck (randomness) has 0% influence on the outcome. I don't buy that, but something like 70% or 80% skill might accurately describe poker played at its highest levels. "Playing" the market is the same--gain skills and what used to look like random events will start to make sense.
However, the point of seeing the market as random comes from not being able to find a mathematical equation to compute its output. E=MC squared. We can compute the effect of changing either of the variables. The market can not be equated this way, there are many variables determining the value at any point. Some behavioral some economic, that's why it is seen as a random system. Obviously there is a certain structure to this randomness, certainly it is not a chaotic system, but one could argue it is a complex system as there are many variables at play. The point is, it is not computable; hence random. The author tried to argue that the market was due for a correction based on Newton's law. That appears to be a simplistic argument in my opinion. In any case, after reading some of his articles and comments, I am now sure he was kidding.
Ah, the old poker analogy. Poker is a game of part skill and part randomness. The skill is in choosing which cards to play, position on table, how to play your dealt cards, who to go against etc. The randomness is found in the 5 cards common to all players. (For Texas hold'em) Again, you can not control this part of the game. A successful structured player will have a positive trend line, due to his/her skills, but there will be periods when the player will be either below or above the mean or trend line, which is because of the randomness of the game.
The last point is expected return. We can compute expected returns in gaming situations because the rules of the games are defined and they don’t change. We have to be careful adapting gaming situations to ‘real life events’ such as the market. There are no defined rules, whatever structure that appears to exist can be changed at any time. Therefore computing expected returns is only be done by observation of empirical data, which is touching on the regressive fallacy. Author Taleb, in his book “Fooled by Randomness’ explains his views in detail (actually it might have been from his book “Black Swan”) believe he calls it the lucid fallacy.
Good luck at the tables :)
On Sep 16 09:36 AM David Van Knapp wrote:
> Poor reasoning. Laws regarding physical bodies make nice analogies
> sometimes, but in fact they are irrelevant to markets, which reflect
> human, not physical, behavior.
>
> On the other hand, the market is not random, either. An event only
> looks random to you if you don't know the reason it happened. Everything
> that happens in the market happens for a reason. When all the millions
> of reasons are toted up, you get market moves.
>
> An analogy to poker is apt. To the absolute newbie, poker is completely
> random...you either get good cards or you don't. But as poker players
> gain experience, they realize that there is skill involved. A fair
> poker player might say it's 30% skill and 70% luck. But as you move
> up the ladder, skill takes on more and more of a role. At the highest
> level, some poker players say that luck (randomness) has 0% influence
> on the outcome. I don't buy that, but something like 70% or 80% skill
> might accurately describe poker played at its highest levels. "Playing"
> the market is the same--gain skills and what used to look like random
> events will start to make sense.
I do like Hooke's Law as it applies to the chart... probably more than Sir Isaac's.
I am not sure that see the poker analogy. I agree that 70-80% of poker is skill, but I am not sure I agree with that market-wise.
I am more a believer that much of the market direction is based on feelings and emotions... something that good poker players best guard against...
My inspiration for the post originated in the observation of the chart.. not necessarily any physical law...
If one assumes that significant negative emotion led to the 777 point drop in the dow, it cannot be much of a stretch that a equal and opposite upbeat emotion will lead to a 777 point rise.
GNE
goodnewseconomist.com
In respect to stock markets, I find it hard for my mind to think on those terms, because to me it's a fruitless game attempting to predict the machinations of indices with multiple businesses. Too many variables.
Anyone who can ought to be using index futures on the CBOT; if you can predict rightly, you can make more money than Buffett has ever dreamed of having. If you're young and think you can, try it. You'll learn more than you'll make most likely, but it will be worth it.
But to me it's similar to taking a shotgun and firing away hoping at least one pellet will strike a fruitful spot. I'd rather take dead aim at individual stocks with a rifle.
To me it's the difference in investing by general thinking versus specific thinking. I've always done better by the latter. Less variables.
As to poker, professional card players are few and far between, but a consistently successful player is not going to think much about randomness—and is going to believe very little if any in luck.
I personally don't believe in luck at all. I believe in odds.
A player thinks odds, thinks return on money risked, and perhaps most important of all (as is true in investing and trading), money management.
A professional is going to start first with who's playing in the game. He's not going to sit down at a table with a bunch of winners simply to challenge their egos. These would be showdogs looking to boost their egos, not longstanding winners.
What type of game is it and what's the rake are going to be the next questions. These are obviously going to affect your potential return on investment and thus your risk.
The successful card players I know play one or two games, and that's it. Most of these don't play Hold'em (or at least it's not their first choice), because those five community cards in the middle make the game too much of a showdown. And the card player who looks at card playing as a job wants more control.
Young investors/card players should understand this important point: there is a huge difference between a card player and a successful one.
Little Stuey Ungar won the WSOP Hold'em tournament three times, but he was always broke. I never ran into him that he didn't try to snap me.
Why, you may ask? Stuey was obviously a good player, but he was not a winner. Stuey, like so many players, played for the thrill of playing—not to make money. He never stopped playing. As the old saying went, you couldn't blast him out of a seat. (there are other intangibles involved here I don't want to mention)
The most successful card player I've ever known is the little known Chip Reese. He didn't seek to get his name known by playing in tournaments and such very often; he rather liked what used to be called (and I'm so far away from this now that the terms have most likely changed) the side games, i.e., non-tournament games.
When I went to Vegas in those days we used to get together and have dinner and talk. Don't get me wrong now folks; I'm not putting myself in Chip's class of card players at all or his class of thinker—at all. Chip could think and he could play, and he knew how to win. He bet more in one hand than I ever won in my life.
That said, we did like to talk strategies, as we called them, which meant money management and risk and another ability (one that to this day I'm not sure is habituated or inherited), but it's an important one.
I'll give it to you like this: I once asked him what's the most important thing to him in card playing (or any form of gambling), and he said, "The ability to pull up either winner or loser and not think another thing about it one way or the other."
This is, of course, part of money management.
Chip lived that too, because a few months later a friend of mine called me who lived in Vegas and told me Chip was down over $700,000 in a high-stakes game and just got up and went home—early on. To a confident, experienced professional such as he was, there's always another day, as they say.
He was also a humble, gracious man; you would never know he was a genius at what he did. And I say "was" because Chip went on to better rewards a couple of years ago
I hope this addition to the discussion helps those seeking successful methods in both investing and gambling, the twins of risk-taking for financial reward.
Very good points. I agree almost 100%. Where I deviate is this: in poker, there are breaks that can and do go for you and against you in individual hands, but if on average you have the best hand going in (as winning players work at doing), then in the end you're going to end up with the money.
Although there is much more to making sure you win playing cards, this point is strictly in regard to where most people believe "luck" is involved: the fall of the cards.
(Me, I wanted to win before I sat down. I therefore hunted the weaklings of the herd, and left the strong ones to run on their own. This put the odds even more in my favor.)
Thus, at the end of the day, the best players get the best cards and take the money home.
As we used to say, Losers talk about "luck"; winners speak of what kind of game it was, "loose or tight."
I like your investing style.
On Sep 16 09:36 AM David Van Knapp wrote:
> Poor reasoning. Laws regarding physical bodies make nice analogies
> sometimes, but in fact they are irrelevant to markets, which reflect
> human, not physical, behavior.