Trading Nation

A 'remarkable' connection between two market risks

The emerging market and high-yield connection

As U.S. stocks have tumbled in the past week, spurred in part by weakness in global markets, one technician says investors can gauge risk using the connection between two major market concerns.

According to technical analyst Rich Ross of Evercore ISI, the iShares Emerging Markets ETF (EEM) and the iShares High-Yield Bond ETF (HYG) have a "remarkable" technical symmetry.

"Going back to the beginning of both of these ETFs, they've traded in lockstep," Ross said Tuesday on CNBC's "Trading Nation." "Sometimes in this world it's a coincidence and other times it's causality. I think here the truth lies somewhere in the middle."

Ross said the main connection between the two is in energy. About 13 percent of HYG's holdings are exposed to energy. Meanwhile, emerging markets are largely driven by commodities such as gold and crude, which have been hit hard by China's economic slowdown and have created head winds for high-yield bonds.

Read More 5 reasons why China's woes are shaking the global markets

"If you're trading stocks, as a proxy for risk, watch EM and watch high yield," Ross said Tuesday.

Andrew Burkly, head of portfolio strategy at Oppenheimer, draws the recent market selloff back to increased pressure on commodities.

"What we really need to see for the broader U.S. market to go higher is some stability in commodity prices, stability in China, stability in EM, high yield, all of these different markets that are correlated," Burkly said.

Until he sees that stabilization, Burkly recommends avoiding small-cap and large-cap stocks.

"The sweet spot is maybe the mid-caps and those with more domestic revenues," he said. "That's where you want to maintain your U.S. exposure."


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