For most of this year, we've been writing about the overwhelming amount of bullish evidence for U.S. equities. However, as part of our "weight of the ♛evidence" approach, we're always questioning our thesis (i.e.,  and ).

In today's post, I want to share that exercise as I perform it, outlining some current concerns and what the market would potentially look like in an environment where stocks as in the U.S. as an asset class are falling. We're going to stick with our top-down approach and start with international eq🐎uities and inter-market relationships, then drill down into specific examples that help i🎃llustrate what we're talking about.

In early July, we spoke about the slight deterioration in , but we pointed out that shifts from uptrends to sideways in many of these markets were not inherently bearish. What we didn't want, and still don't want, to see is a resolution of those sideways 澳洲幸运5官方开奖结果体彩网:consolidations to the downside rather than the upside. Since that post, we've still not not seen a decisive shift one way or an🦂other in total uptrendsꦆ or downtrends.

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First off, let's start with equities as an asset class. Since the 澳洲幸运5官方开奖结果体彩网:U.S. Dollar Index bottomed in mid February, 澳洲幸运5官方开奖结果体彩网:emerging markets as a group have lagged behind their 澳洲幸运5官方开奖结果体彩网:developed market counterparts. While this relationship has begun to stabilize over the past few weeks, the chart continues to suggest that it's 澳洲幸运5官方开奖结果体彩网:range bound at best or continuဣing its ꧃downtrend at worst.

Within the emerging markets space, countries like Brazil that have 澳洲幸运5官方开奖结果体彩网:commodity exposure are being hit the hardest. Others like India that have a larger emphasis on IT and consumer goods have outperformed on a relative basis and continue to do so. If there's any group that's going to lead us to the downside, it's going to be those emerging ꦉmarkets with exposure to commodities, l🐈ike Brazil.

On the other hand, developed markets like the German DAX have struggled to make upward progress and are testing important 澳洲幸运5官方开奖结果体彩网:support levels like the one shown here. In a market where U.S. equities are heading๊ lower, we'd likely see many of these consolidations resolving to the downside.

Sticking with Europe for a second here, the relative performance of European financials versus the 澳洲幸运5官方开奖结果体彩网:EuroStoxx 50 is a risk appetite barometer that we want to see trendi꧟ng higher, not range bound like we're seeing here. A break of the recent lows is something we'd likely see in an environment where stocks in the U.S. and globally are breaking down.

For those markets like Taiwan that have been showing 澳洲幸运5官方开奖结果体彩网:relative strength, a breaﷺk below key levels (in this case former resistance dating back to 1990) would be another bearish development that would get our attention.

In the 澳洲幸运5官方开奖结果体彩网:bond market, we typically like to see 澳洲幸运5官方开奖结果体彩网:high-yield bonds outperforming 澳洲幸运5官方开奖结果体彩网:investment-grade bonds and 澳洲幸运5官方开奖结果体彩网:Treasuries to signal risk appetite, yet throughout 2018, we've not seen these spreads participate to the upside as equity markets trend higher. The continued stagnation or a resolution to the downside is not something we want to be seeing. Bulls want these ratios to resolve their recent ranges to the upside and  hitting 澳洲幸运5官方开奖结果体彩网:overbought conditions. We've not seen it yet.

Getting into U.S. equities now, one relationship we may see deterioration in ahead of an extended correction is the "Offensive vs. Defensive Sectors" ratio, which has been leading to the upside in 2018. 

Other inter-market relationships that we use to measure risk appetite include the 澳洲幸运5官方开奖结果体彩网:Dow Jones Industrial Average vs. the 澳洲幸运5官方开奖结果体彩网:Dow Jones Utility Average, S&P High Beta vs. Low Volatility, and Consumer Discretionary vs. Consumer Staples ratios. All three of these saw some deterioration throughout 2018, breaking significant support levels several months ago, and now they have all reversed sharpl🏅y higher to reclaim support. Bulls want to see this short-term improvement continue into the intermediate term, with all these ratios making new highs at some point. 

Getting into the  on the daily chart, we finally got an upside breakout from its year-to-date range with momentum getting into overbought conditions. This is not bearish behavior, but what would be bearish is a reversal to the downside and closing back below the January highs, confirming a 澳洲幸运5官方开奖结果体彩网:failed breakout.

So what could drive that reversal? Well, many are pointing to the potential bearish 澳洲幸运5官方开奖结果体彩网:divergence in breadth. The Russell 3000 has made new all-time highs, yet we've seen fewer stock🎃s in the index making new highs.

We're also seeing fewer stocks with momentum in a bullish range (we define this as a 14-Day 澳洲幸运5官方开奖结果体彩网:relative strength index [RSI] greater than 70).

What's important to recognize here is that these measures do not account for the 澳洲幸运5官方开奖结果体彩网:sector rotation we're seeing under the surface. While some leaders rest, we're seeing new leadership emerge tꦍhat might not yet be at new highs given its underperformance versus the index. With that said, if prices do reverse and we've not yet seen these breadth indicators make new high🦹s, these divergences would be confirmed and warrant our attention.

We're seeing similar action in the 澳洲幸运5官方开奖结果体彩网:Nasdaq Composite and 澳洲幸运5官方开奖结果体彩网:S&P 500. Yes, there are potential divergences in breadth, but until it's confirmed b✱y prices breaking their former highs, then the i⭕nformation remains informational, not actionable.

Another potential red flag is the 澳洲幸运5官方开奖结果体彩网:Dow Jones Transportation Average, which is back at the Ja♔nuary highs. However, momentum barely made it back into overbought conditions. This potential divergence fr🌠om a leading sector would be confirmed with prices closing back below support at 11,115.

We're seeing a similar divergence in the leading Aerospace & Defense sector, which made new highs but has stalled, and momentum has failed to reach overbought conditions.

Last on our list is the lack of participation from the broad-based Financials ETF (XLF), which remains range bounඣd. This is an important part of the market, representing roughly 14% of the S&P 500, and a lack of leadership from this group remains a concern. While a consolidation through time is not inherently bearish, a resolution to the downside and momentum remaining in a bearish range would be.

U.S. 澳洲幸运5官方开奖结果体彩网:broker-dealers have been the outperformers in this group, so a move lower from its year-🍸to-date range would likely have bearish implications for financials overall.

I'm sure there are other relationships like the declining performance of the 澳洲幸运5官方开奖结果体彩网:semiconductor index🌳 relative to the Nasdaq and S&P 500 that are important and considered during our process, but I wanted to keep this post as brief as possible. Hopefully it has provided some insight into our thought process and the specific developments we’'e looking for in the current market environment that would change our bullish thesis.

In a falling stock market, we'll likely see some or all of the conditions discussed above occurring. With that said, it's unlikely that they all turn at once, so we'll see the shift in the weight of the evidence one chart and one data point at a time as we monitor and re-evaluate our thesis each day.

Thanks for reading, and  your thoughts!

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