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Monday, 6 March 2017

One of the Several Secret Pillars of the Financial Markets: 6 March 2017, Monday, 2.22am Singapore Time

(Click on the Chart above to Enlarge)
Secret Pillars Chart 1

The above Chart 1 attached shows different sectors of an economy, in this case the sectors of the US economy. US economy is used here because it is the largest economy in the world and it is an influencer. When influencer US sneezes with an influenza, the world catches a cold. Following the GDP calculation of C+G+I+(X-M) and the GDP approach of Aggregate Demand and Aggregate Supply within an economy, the key litmus to the health of any contemporary economy can then be boiled down to 4 core litmus-sectors as illustrated in the above Secret Pillars Chart 1.

Historically, there used to be the Dow Jones Transportation Theory, which in essence makes use of the Dow Jones Transportation Index to confirm the Dow Jones Industrial Avg Index. As with all financial modelling, as the world gets modernised, worldwide economic structures get metamorphosised and companies no longer do businesses mainly within their respective domestic economies. This is especially so for the United States with many of the listed companies being MNCs. Many companies within the Dow Jones Industrial Avg Index, Standard and Poors 500 and NASDAQ Composite Index are international companies coming from a myriad of different sectors. This why Dow Transportation no longer work well nor confirm. In addition, the way in which goods are transported and services provided have become different, at times even innovative for efficiency, rendering the Dow Jones Transportation model of confirmation obsolete and useless. As 3rd world countries become 2nd world, and 2nd world developing economies become 1st world developed economies, and with Central Banks playing more important roles in an increasingly globalised world, new systems of confirmation, triangulation and approaches of the market are necessary. 

Dow Jones Industrial Average

NASDAQ Composite

S&P 500

In 2016 (refer to the 3 charts attached above), while many people were bearish and most "experts" were warning that a nasty bear market is coming, how do you know that all these noises are nothing but trash and junk? How do you know that markets have actually reversed secretly back into a sustainable bull market resumption, doing this stealthily amidst the gloom and doom and the conviction sells that most people were indulging in? There is a secret key which one can use to unlock the pack of lies in the markets. This secret key can also be used in future whenever one is unsure again. Out of the several secret keys that I have on hand, I am handing this secret key to you. You can view this secret key as one of the several secret pillars underpinning the S.O.P of the contemporary financial markets.

Refer to the Secret Pillars Chart 1 again as below:
(Click on the Chart above to Enlarge)
Secret Pillars Chart 1

In a Selective Sector Core GDP approach of financial modelling, the Consumer Discretionary sector can be viewed as the Aggregate Demand with High Income Elasticity of demand. In case you are not sure what these technical jargons are, as defined by Investopedia, Consumer Discretionary is the term given to goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them. Consumer discretionary goods include durable goods, apparel, entertainment and leisure, and automobiles. Consumer Discretionary sector can be tied to the employment, income, wealth effect of an economy. When future economic health is to worsen, this sector of goods demanded is one of the first to be forsaken, hence the high income elasticity.

Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income. In essence, when an economy is indeed healthy, Consumer Discretionary side or Discretionary Consumption will be bullish. As Discretionary Consumption is highly income elastic, it is hence highly sensitive to the performance of an economy as well as the wealth effect within the economy. It is a sensitive leading indicator compared to the Supply side (production side) of the economy. Which are the production/supply side? We will delve into it in the next paragraph. Consumer Discretionary within the US economy can generally be measured by the NYSE: XLY, the SPDR Select Sector Consumer Discretionary (see Chart 1 above).

Under a simplistic and minimalist approach to economics (take away the services domain for ease and clarity, yet not affecting rationale and overall judgement), Basic Materials (NYSE: XLB), Industrials (NYSE: XLI) and Financial Sectors (NYSE: XLF) can be regarded on the Supply Side perspective. These are necessary for the production of goods and services. The concept of "to produce" can generally be regarded as the Supply side production of the economy constituting GDP. As a process chain, XLB will be input into XLI part of the chain, and XLF will supply its input into XLB and XLI Sectors. From XLI sector, goods are produced which will then feed into the growth of services sector.

The 3 sectors of XLB, XLF and XLI are generally not responsive nor sensitive enough to changes in the Aggregate Demand of the economy for instance to changes in demand in the XLY, ceteris paribus. Using a simple explanation, for instance on a micro-economics level, a factory is not able to ramp up sudden large increase in production within a short time (due to labour, machineries, etc constraints). A factory is also not able to expand in a short time to meet significant increase in demand. All these take time.

Similarly, when Aggregate Demand (Consumption and Consumer Discretionary) are reduced, factories are actually still producing whatever targets that they had set many months to even a year before. There is a time lag before the Industrials can cut production and lay off workers. Consumer Discretionary (XLY) tends to change before the effects are trickled to the Industrials (XLI), Basic Materials (XLB) and perhaps Financials (XLF). Generally, XLY is more leading with respect to XLI, XLB and XLF. Alternatively, XLI, XLB and XLF are more laggard compared to XLY. Changes to XLY can be due to internal sources or it can be due to external sources or it can be due to both. Most often, if a country is not doing well, in layman terms, it means it is not selling enough to other countries, that is to say, it is not doing well in the international trade and finance. XLY will suffer as a result.

If consumption and discretionary consumer demand are rising, they will have a pull-up effect on the rest of the production (supply) side of the economy because Aggregate Demand is more than Aggregate Supply, whether it be from internal sources or external sources of the economy. The economy can then be regarded as healthy and having vitality, and this momentum will tend to maintain as a spiraling upwards momentum (demand for consumer goods causes increase in production as well as increase in employment and income, which further causes yet more increase in demand for goods and services when employment and incomes go up), and that is to say, the bull is healthy, the run has legs and has basis, and the run is sustainable due to the spiraling cycle.

Apply this key concept to unlock the truth in 2016 and 2017 onwards now.

In early 2016, markets worldwide sold off sharply. It is actually a standard litmus operation to determine the health of the financial markets worldwide. Much like the great economist Adam Smith's Invisible Hand, this Standard Operating Procedure is also to test the Invisible Hand of Demand and Supply in the financial markets. More explanation as below.

Refer to the Secret Pillars Chart 1 again: while the DJIA, NASDAQ and S&P500 were making similar lows or lower highs and lower lows in 2016, even though XLB (basic materials) and XLI (industrials) were showing weaknesses (RED CIRCLES on Secret Pillars Chart 1), XLY (the discretionary consumption sector) was showing strength (GREEN CIRCLES on Secret Pillars Chart 1). Surprisingly, even XLF (financial sector) was showing strength (GREEN CIRCLES on Secret Pillars Chart 1), possibly even knowing in advance in 2016 that Dodd-Frank regulation would be removed in 2017, which it eventually did.

During this time, US markets had already confirmed strength in the bull market and that we are going to break up for new highs with the bull sustainable for at least 1 year to an expected 3 years or more. This is why in 2016, I had already forewarned that DJIA will consistently make higher and higher historic highs, destroy its peakish top, break past 20,000 points and make it the new support. This earned me 3000 points per contract in a short time. A mere 100 low-risk contracts = 100 x 3000pts = $300k USD in a short time with the super rally.

The XLY, which is the consumption sector, has strength during the invisible hands test, and it reflects true health. In addition, this system of aggregate demand from the Discretionaries lead aggregate supply, comprising the industrials etc, towards a spiraling upwards momentum. It also leads to the supply side of the economy continuously creating employment, income and wealth effect for the discretionary consumption to further go up and the cycle repeats. In essence, wealth effect is trickling down to the main streets.

Now comes the treacherous part. As the US market is a market that is full of pokers' liars, treacherously filled with bluffs and fake moves, and it works as an America-First concept (Yes, America First , The Rest of the World comes Last, it is nothing new, Donald Trump merely recycled this concept), we need another complement to provide triangulation to the US.

This market for triangulation has to be the complete opposite of US markets. In contrast to the US, this other financial market complement has to be a straight-forward honest market, too honest and too straight for treacherous moves nor bluffs, and works as an "itself last, the world comes first" concept, directly opposite to the US.  This complement for triangulation can only be the Singapore Market, the another major financial centre of the world.

For the veterans, it is also no secret that Singapore market is straightforward and even clamps down hard on manipulators. Being a small country, it is highly sensitive to the true health of the global economies and, unlike US, Singapore cannot afford for Singapore-First and to implement too much monetary policy as stimulus. If US is on one extreme in market characteristics, then Singapore will be at the other end. When 2 extremes triangulate, the result of the analysis cannot go wrong and can be said to be sufficiently strong. 

(Click on the Chart above to Enlarge)
Secret Pillars Chart 2

Attached above is the Secret Pillars Chart 2 showing the Singapore FTSE ST Consumer Goods Index (contrast to US' XLY Sector),  Singapore FTSE ST Basic Materials Index (contrast to US' XLB Sector), Singapore FTSE ST Industrials Index (contrast to US' XLI Sector) and Singapore FTSE ST Financial Index (constrast to US' XLF Sector). The reason why the opposite extreme of the US market has to be used for triangulation will be further covered in the next paragraph onwards.

As the US is a large economy, and that the US Dollar is the most important and most widely used currency in international trade and finance and in international settlements, the US is able to apply Quantitative Easing and monetary policies to stimulate itself without causing too much immediate harm to itself. In essence, it has the muscle for an America-First concept for its economy. Hence in 2013, 2014 and 2015 to early 2016, while US XLY Discretionary Consumption Sector is stimulated and goes uptrend, the Consumption Sector in Singapore as a litmus to the rest of the world ex-US (the other extreme end in relation to the US) is not confirming to this trend. What does it mean? It means the rest of the world was not benefiting.

As the crossroad of international trade and finance, Singapore is highly exposed to the health of the regional markets and global trade. If international trade and finance do not do well, or that global economies are not truly healthy, Singapore will not do well. This will be aptly reflected in the Consumer Goods Index when wealth, income and employment are on downturn. This is why in 2014, 2015 and up till early 2016, the Consumer Goods Index was going down, reflecting the mire circumstances of Europe and Asia generally. As a result, Basic Materials and Industrials would be dragged down. As a further result, the negative effects will be trickled down to the Financials when industrials and businesses are not borrowing. This was the true litmus of the regional economy and global economy as litmus out by Singapore in contrast to the US economy and US market.

It is also the reason why when the US was strong in 2013, 2014 and 2015, we can already anticipate in advance that in 2013, 2014 and 2015 the rest of the world would be a pale shade in comparison to US, and markets would under-perform in Asia and Europe. Because US stimulated itself successfully and got high. The rest of the world could not get high while the US was feeling high. This is the reason why financial markets were very mixed in 2013, 2014 and 2015 and the reason why most investors would easily lose money in 2013, 2014 and 2015 in Asian and European markets, because they do not know that Singapore indices as the world's truest and most reliable indicator had already signaled fragility like those RED BOXES as shown in the Secret Pillars Chart 2 above: the Consumer Goods Index in Singapore does not just reflect Singapore. It reflects the rest of the world in general. It was just too weak and went going downtrend despite main market indices holding decently. This was why most investors or those going longs in the market in Europe and Asia in 2013, 2014 and 2015 lost easily, a warning which I forewarned back then and turned out true year after year.

(Click on the Chart above to Enlarge)
Secret Pillars Chart 3

This is one of the few reasons why in 2013, 2014 and 2015, I forewarned that while US markets will continue to go up, most people in Asian equities markets and European equities markets will lose significant sums of money in their longs, buys or investments under the wrong impression of the US market movment. The Consumer Goods Index in Singapore was already signaling an alarm while indices in the region mostly look strong as a smoke bomb. With basic materials and raw materials going down (refer Secret Pillars Chart 3 above), it is just a matter of how soon the Industrials, the Financials and the regional markets will be sold down suddenly and sharply such as the oil crash in 2014, those equities selling in 2015 and early 2016 in broad markets in Europe and Asia.

Most people who were in Asian markets and European markets and who were optimistic and bullish amidst the US money-printing period mostly lost money. It goes to show that trading and investing based on surface logic is the easiest way to lose money. Markets do not like to move on established news and facts. Markets like to move before facts and news are established, and then move opposite when news and facts are established. Early bird gets worm and late bird gets birdshit.

Seeing how markets were so bad in early 2016, and with rate hikes, money tightening and bad slew of fear, gloom and doom being splashed all over the headlines in 2016, the news and facts are now established and most people are now bearish. With conviction. Will they be tricked again like before?

Using the same secret keys, and applying the same secret keys to unlock the truth, where are we now then?

It is time for one to apply concepts learnt to new scenarios again such as in 2016 and 2017 onwards.
Refer to the Secret Pillars Chart 4 below: Consumer Goods Index has broken up before all other sectors do. And doing this set-up while the herd are bearish with conviction now.
(Click on the Chart above to Enlarge)
Secret Pillars Chart 4

After the US had confirmed its long-stamina bull using the XLY Discretionary Consumption Sector which will drag up the Industrials, Basic Materials and Financials eventually (and the rest of the all other sectors), in 2017 we are finally getting the most important bullish double confirmation of a long stamina bull-resumption for Asia and Europe. Consumption is finally picking up. Finally. But at a time when market majority in Asia and Europe are full of conviction in gloom, doom, bear and crash. In fact the most critical first confirmation of bullishness amidst fear and doom came from the honest Singapore market as early as 2016 as illustrated in Secret Pillars Chart 5 below:
(Click on the Chart above to Enlarge)
Secret Pillars Chart 5

With markets using August 2015 as a benchmark (refer to Secret Pillars Chart 5 above), the first critical bullish litmus was completed at the start of 2016. How was this done? The very sharp sell-off of January-2016 globally was to test if markets should go to bear market. Instead it created the first signal of resumption to sustainable bull market for the rest of the world, namely Asia/Asia-Pacific and Europe. The Consumer Goods Index and Industrials were revealed by the Invisible Hand much like Adam Smith's Invisible Hand as showing strength. Yet, as soon as this strong down-move probing of January-2016 created sustainable-bull-resumption signal, it also successfully created huge fear and widespread bearish sentiment for the rest of the world.

So here we are, finally at the double confirmation of sustainable bull, with the Consumer Goods Index being the first to break up (I attach Secret Pillars Chart 4 again):
Secret Pillars Chart 4 attached here again

With all other sectors having to produce more upwards supply momentum just to catch up with the upwards consumption momentum now, with consumption as the leader, in a healthy way, the bull-resumed market has got plenty of legs now. However, this comes at a time when most people are flipping to bearish view starting from 2016. Yet again, this shows that most people will be wrong most of the time if they do not know all these concepts as taught above. Isn't it amazing that we can see that the herd often does the complete opposite because they read too much news and established facts that result from the past? Often, the herd also learn their technical knowledge from all the high profile, high advertising but wrong sources.

Finally in 2016 and 2017, we have the important Singapore-Last market as an important litmus confirming the important America-First market. It means stimulatory effects from the US is finally trickling down to the rest of the world. When these 2 very important financial markets in US and Singapore triangulate bullishly, the US, Asia and Europe stocks and equities markets all over the world are guaranteed to rally in a no holds barred manner, because market health and economic health is finally re-aligned and confirmed. During this stage, even penny stocks will soar to the sky. Starting from 2017, penny stocks all over the world indeed started to have action per my forewarnings of 2H-2016.

Refer to the Secret Pillar Charts again: it is why in 2016, I can already tell in advance that in 2017, suddenly bad economic data will turn into good data for Europe and Asia/Asia-Pacific including China and Japan. This was also what happened for the case of Singapore at the start of 2017, when suddenly plenty of good data comes in and Singapore is no longer sick man of Asia or having technical recession. Good news and good data will come to the rest of Asia-Pacific and Europe as Singapore economy is highly sensitive to world economies and often one of the first to react.

The wealth effect pouring from Central Banks and Wall Street will finally be trickled into the Main Street and all over the world. Spiraling upwards momentum has been re-injected in essence. Often, this kind of momentum can last several more years very much to public disbelief. This will then continue to become one of the most hated bull markets since history especially to those who continually take the wrong side of the boats. All Asian markets, European markets and US markets will continue to have sustainable long term rally.

You have been handed One of the Several Secret Keys of the Financial Markets. If anyone tries to throw smoke bomb at you in the future, throwing you into the wrong directions, do use such analysis techniques to see the true light. 
You have what it takes to succeed and excel like me.
Believe in yourself.

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