20 years of history shows this is negative for stocks: Expert

There's a warning sign flashing for stocks, but it's not coming from the equity market. Instead, it's coming from the bond market.

High-yield bonds, which often serve as a proxy to where the stock market is going, has been selling off sharply, with the two largest high-yield bond ETFs, the HYG and JNK, trading at the lowest level since November 2011. And according to one expert, the recent pullback is a noteworthy sign of what's to come for stocks.

"If you look back to [past] selloffs, when the high-yield market dramatically underperforms in a short period of time, it's a very good warning sign for equities," Larry McDonald said Wednesday on CNBC's "Trading Nation." Since the market's last significant pullback in October 2014, the S&P 500 and HYG have seen a substantial divergence, as the S&P 500 is up more than 9 percent and the HYG is down nearly 5 percent.

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"If you look back to 1996, [the underperformance of high-yield] has been a correct warning sign about 72 percent of the time in terms of being a predictive indicator of an equity selloff," said McDonald, head of U.S. macro strategies group at Societe Generale.

But from a purely technical perspective, Todd Gordon of TradingAnalysis.com said there's nothing to worry about. "If you look at a chart of the HYG and the S&P 500 going back to 2013 you see that high-yield has really underperformed," the CNBC Contributor said in a "Trading Nation" segment. "If you weren't long equities because of the performance in high-yield, you really missed out on a spectacular rally."

And while McDonald didn't refute Gordon's notion, he did stress the importance of looking at the acceleration of the deterioration of high-yield rather than the long-term performance. "Looking at the long-term spread isn't going to tell you much," he added.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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