Secret Pillars Chart 1
Secret Pillars Chart 1
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).
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.
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.
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.
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.
Secret Pillars Chart 2
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.
Secret Pillars Chart 3
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?
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.
Secret Pillars Chart 4
Secret Pillars Chart 5
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.
Believe in yourself.