As we close the books on May, the S&P 500 has a two-month gain of nearly eight percent. We have offered reasons for investors to expect this advance to continue, although we certainly cannot vouch for the pace.
With increasing frequency we are seeing comments that the U.S. market gains are "parabolic" or sometimes "straight up." We will not cite specific references to those using these terms, but if you watch for them, you will see what we mean.
Terminology often has a strong symbolic content. It may be designed to express emotion or to convince readers of something that may not stand on facts alone. At "A Dash" we have noted the pervasive use of negative symbols in discussing the stock market, and sometimes offered alternatives.
We strongly suspect three things about parabolas and those following the stock market:
- Even the really smart people who are following the market carefully do not remember enough geometry to define a parabola, or to write the mathematical equation. You can check your own definition here.
- These same folks cannot draw a parabola.
- Everyone knows that parabolic growth is some unsustainable pace. Parabolas precede bubbles and crashes. That is the source of the symbolism.
The figure below shows a parabola of the simplest form, where Y=aX^2.
The increase in values on the right side of the chart has that unsustainable exponential quality. You can see more images of parabolas at Wikipedia.
Parabolic Growth and Stocks
When the Shanghai Composite declined over 6% before Thursday's U.S. trading, there was plenty of discussion about whether this had a significant bearing on the prospects for U.S. stocks. Some suggested that both markets were "parabolic." Now that we understand what this means in factual --not emotional -- terms, a simple chart is worth many words.