How do we estimate the indexes on Wall street based on the thermo-dynamics analysis method?
Easily, if by "order of magnitude" estimate and supply (number of shares) is constant. Market movement in case of demand exceeded supply is value goes up. If demand (cash input) equals supply (new stock IPO ), market stays the same. If IPO's exceeded demand, the market crashes.
With input of $100 billion(401k, foreign investments, tax rebates), and Wall street salary and expenses of $10 billion this year, we can estimate how high Dow can go without dislocations. Dow started at 6000. May end with 8000. $90 billion for 2000. Next year if input less expenses is the same, Dow will go to 10,000. So far so good.
All indexes can be estimated the same way.
Of course, some money goes to NYSE, some goes to Nasdaq, and very little goes to AMEX. The exchanges compete with each other, so, the estimate is only good in terms of "order of magnitude" accuracy. It does point out the direction. But it also indicates the well being of the listed companies as a whole; when Wall street receives the constant or increasing money input.
However each year the stock market appreciates, the formula of cash liquidity is [this year's index-last year's index/this year's index]x5%(constant for trading liquidity)+cash reserve percentage of last year=this year's cash on hand percentages to meet the requirement of this year's index. From cash on hand percentages you can calculate the index pull back to balance the market value.
Overvalue or undervalue, thus market value can be estimated. |
