Unexpectedly Intriguing!
August 28, 2008

What do you think you would see if you animated the trajectory of the S&P 500 during the course of the Great Stock Market Bubble of the late 1990s?

Well, if you're us, and you've previously drawn upon the work of both Copernicus and physicist Niels Bohr to describe insights into the nature of the stock market, seeing the phenomenon of Brownian motion should almost be expected!

As a quick review, Brownian motion is best described as the random motion of particles suspended in a fluid that is caused by the particles beng struck by individual molecules or atoms within the fluid itself. A rather famous paper by Albert Einstein back in 1905 proposed a method by which it would be possible to confirm the existence of atoms and molecules that relied upon the phenomenon to do so. In fact, Jean Baptiste Perrin built upon Einstein's theoretical work in this area to finally experimentally confirm the discontinuous nature of matter in 1913, for which he eventually won the Nobel Prize in Physics in 1926.

Here's a computer simulation that illustrates Einstein's explanation of Brownian motion, but if you prefer not to enable Java, here's a YouTube video of another computer simulation demonstrating the phenomenon:

Now, how does all that matter to the stock market?

It's long been established that changes in stock and bond values are best described as being a kind of Brownian motion, which is represented in the randomness apparent in how their values change over time.

In this case however, the changes in stock and bond prices are affected by the unseen forces of buying and selling in the markets. In the case of a stock market bubble, or other disruptive event in the market, instead of progressing in an orderly fashion as we've previously established, that order breaks down and would appear to result in unadulterated Brownian motion. We've illustrated this using the animated chart below for the S&P 500, showing the average monthly index value against its corresponding trailing year dividends per share during the period from April 1997 through June 2003, the timeframe for the Great U.S. Stock Market Bubble:

The final dark line in the animation indicates the reemergence of order in the stock market after June 2003. Here's our original chart indicating the dates for a number of the points:

S&P 500 Index Value vs Trailing Year Dividends Per Share, April 1997 Through June 2003, The Bubble

Pretty cool!

Labels: , , ,

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Stock Charts and News

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button


The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links

Useful Election Data
Charities We Support
Shopping Guides
Recommended Reading
Recently Shopped

Seeking Alpha Certified

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.