Ursa Major or Ursa Minor?

I have been getting increasingly more cautious about the equity markets, starting in early April and more cautious last week. Now that the markets seem to be in a pullback mode, the key question is: What's next?

Regular readers know that I use commodity prices as the canaries in the coal mine of global growth and inflationary expectations. The canaries are not behaving well, as shown by the chart of the CRB Index below. Commodity prices have broken out from a steady uptrend and they are now testing a critical support level. I am now watching to see if those key support levels hold.

Commodity sensitive stock markets like the Canadian market is showing a similar pattern of testing important support levels.

Looking further at emerging market equities, which is another important barometer of global growth expectations, EEM has already violated an initial support level, with the next support at 44. I will be watching if there is further weakness and if the critical support at 44 holds. Looking across the BRIC markets, both Brazil and Russia have broken down technically, with the former in a clear downtrend.

Then there is the elephant in the room - China. Given the fragility of the global economy, getting the China call right is going to be really important. I am now watching closely how the Shanghai Composite behaves at the different support levels.

A clearer picture can be seen by watching the Hang Seng and if critical support at around the 22,600 level can hold.

In short, the market is clearly in corrective mode and my inner investor believes the markets have the echoes of 2008 here. Then, we had a commodity price blowoff, just as we do now. Then, we had looming macro risks overhanging the market, just as we have now. Consider, for example, John Maudlin's excellent explanation of European sovereign risk here.

On the other hand, my inner trader tells me to listen to the markets and trade their whispers, rather than listen to my own biases. Though the major market averages in the US and Europe aren't behaving as badly as some of these charts that I have shown above, watching how the different markets behave at these critical support levels will give us clearer signs of whether we are dealing with Ursa Major or Ursa Minor.