In July I looked at the trend and momentum readings of stock markets around the world and India's Sectors to identify the overall risk appetite for Equities. Today's update will perform the same exercise and compare the results to determine if breadth has improved, deteriorated, or stayed the same, as well as what the implications of these changes are.

From the desk of Tom Bruni @BruniCharting

A major part of the thesis for higher prices in Canada was the breakout in Financials (and REITS) which represent roughly a third of the TSX Composite, however, over the last few weeks we've seen failed breakouts in many of these leading stocks.

In this post I'll highlight some charts identified during my Chartbook update that describe the type of environment we're in for Canadian stocks and why a more neutral stance appears appropriate. Given the correlation between equity markets around the world, I'd also encourage you to read some of our other free pieces about the US here, here, here, and here.

From the desk of Tom Bruni @BruniCharting

After last week's move to the downside I figured there would be a lot of changes to the IBD 50, and there were, so I want to highlight the characteristics of some names that continue to hold up well.

Some of you guys have been reading my work for over a decade. But I understand there are many newer readers, so I think it's important to address what's going on here. I've been called a Permabull many times for over 2 years now, meaning that they believed I just always had a bullish bias towards stocks. The truth is that while so many were eager to pick a top during this entire rally, I was consistently bullish because the weight of the evidence pointed that way. This is no longer the case and our approach has had to adapt over the past week to a new environment.

We're fortunate to have been accurate with our risk levels. As soon as Small-caps broke 169, things got bad. There was no reason to be in them for us if we were below that in $IWM. Large-caps broke our levels early this week and things got progressively worse after our prices were breached. That is why we set them. That's the good news. The bad news is that I'm confident this is just the beginning.

I believe we are entering a period of what is, at the very least, a period of consolidation. I think we're lucky if it's another 2015...

Here is a list of stocks we want to be shorting to profit from the new bearish stock market environment we've been in this month. I believe this type of market is here to stay and here's how we can benefit:

Is this 2008 all over again? 1987? 1929? I doubt it.

We're not seeing any stress in credit, which is where the real problems start. In fact, some stocks and sectors are going up while others are going down. We've seen relative strength in Energy, Utilities and Consumer Staples. Remember, the Dow Jones Industrial Average closed at a new all-time high just last week. It's easy to forget right?

So what's the problem? The problem is that we have failed breakouts in all of the major U.S. Indexes, and at the very least, it is going to take some time to resolve. The questions are: How long? and How low could we go?

The way I see it, we're either buying stocks at higher levels or we're buying them at lower ones. If this is just a shake out and we take off from here, that's fine. If we go lower, which is the higher probability, then it will take a series of positive divergences in breadth and momentum. All of the risk management levels we highlighted throughout September have been violated. That's life.

Here are the levels we have identified as the most important moving forward:

It's not just the U.S. that is breaking our important levels, stock market indexes all over the world are reacting to the volatility. Europe is flirting with dangerous areas but Brazil and Russia have bucked the trend, likely due to their exposure to Energy. Other countries like India and Tech based markets have been the ones coming off the most in the emerging group.

What else can we do with that money?

That's the question we always want to ask ourselves.

I get asked all the time, "Hey JC, I own this stock, it's down x amount and I'm not sure what to do?". Man if I had a bitcoin for every time I got asked that one.

To me the answer is very simple. If you woke up that morning and you could do anything you wanted with that money, anywhere in the world, with any asset class, is that stock what you would buy?

If the answer is no, then you know your answer. Go buy whatever you want to buy. Transaction costs are nothing these days, so the pennies on that are no excuse to sit in something costing you way more. 

Two weeks ago I laid out what it would take for us to start getting more defensive in this market and not just blindly buying any and all dips. The thesis was that if certain things happened, they would not be consistent with an environment where we want to be as aggressive, and a more neutral approach would be best. Some of these developments have taken place and the impact has been seen so far in October.

Let's take another look.

Stocks, Commodities, Currencies, this long post will cover all of them as we discuss market conditions heading into year end.

There are a lot of interesting developments working through the markets these days. Whether it's the relentless sector rotation underneath the surface or the divergences between small and large-cap stocks, there is no shortage of topics to discuss about the current environment. I have been in the camp that a breakdown in Bonds to new multi-year lows would likely be accompanied by a lower yen and higher stock and commodities prices. Through last week that strategy has worked really well.

Moving forward, however, how does this face-ripper in rates impact U.S. stocks? Is the relative strength in financials this week a positive sign for equities? Or are they just getting a sympathy bid because of rates? Are Semiconductors finally going to break out above their epic 2000 highs, which they've been flirting with all year? What about Gold and Crude Oil? How do they fit in?

This morning I was on the Benzinga Premarket Prep Show discussing what I felt are the most important topics in the markets right now. Here is the interview in full: