Before coming back to the markets, I want to point out the 20DMF's tendency to fail the current market conditions. We can see below that since the end of QE, the 20DMF - which is a 20-day based trend-following indicator - had to reverse many trades because of a trendless and/or choppy environment. Then, the 20DMF missed on the Brexit and Trump reversals, because the selling ahead of the reversal was not strong enough to trigger an oversold buy signal.
This is the main reason I turned to shorter-term trading, moving to a five-day system. This worked well in 2014-2015, but 2016 was not that good, especially since July.
Besides the portfolio gains, I look at the average Risk/Reward ratio and the "money at work", which is the portfolio's invested ratio. We can see below that since mid 2016 the R/R ratio has been between 1 and 2. (Below 1 indicates that the investment strategy is poor. Above 2 points to a very good strategy.)
The invested ratio is very low. This shows that I am afraid to put more money on the table.
The real question for 2017 is whether the new administration will be able to grow the economy while servicing past debt in an environment of increasing interest rates.
Investors have voted "Yes" with the S&P500 pushing to new highs in December. I am not so sure!
Velocity of money is still weakening. We need the same $ to chase goods more rapidly. This means that the US$ needs to become a hot potato and not the safe haven it is right now.
The good news is that excess reserves are decreasing. This could be viewed as a sign that consumers are spending cash on the economy and/or that investors are favoring risky assets.
The big issue for the coming months will be to correctly assess rates -- Japanese and European as well as US rates.
For now, the rate differentials have rendered US assets, especially equities, very attractive to foreign investors. However, this differential is weakening.
The US$ is again attracting money, probably another indication that foreign investors like US assets more than their own.
This could also be why the Cumulative Tick was so strong yesterday.
In this context of a stronger US$ and higher US rates, it feels strange to see gold pushing higher.
Conclusions:
I still think equities are ahead of themselves: the "reflationary" narrative has been priced in for perfection even though the new administration is not operational yet. Regulatory reforms take much time measured in months and years. Helicopter money or a US$ devaluation would greatly help, but it is not planned for now.
On the positive side, the equities markets are not weak here. They are choppy, but the Cumulative Tick is impressively healthy.
