My cat also loves chasing the red laser dot. Anytime, I reach in my pocket for almost anything, the cat, gets in a crouched, stalking position, just assuming I am pulling the laser pointer out to play with her.
There is no question, that she knows where the dot is coming from. One night, I was walking down the hallway in the dark, shining the dot all over. I could barely hear the cat, and could not see her. Suddenly, instead of chasing the dot, she decided to attack the source of the dot, ROUGHLY, YEOOOOOWW !!!! She drew blood from my hand holding it, probably without realizing she was attacking me. That is the last time I held it in the dark, at waist level, where she could easily jump up and attack it.
There is no question that the stimulation is good for the cat. It gives them play time, a bonding experience with the owner, and provides good excercise for the feline, as well as improving their hunting skills. I make sure I always have one with fresh batteries in my house, as my cat considers it part of her daily routine. When I forget to bring it out, she lets me know, by getting in her crouched, stalking position, that is unmistakeably communicating to me, that she is ready to play with and chase the laser dot now.