A 'remarkable' connection between two market risks

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."

Want to be a part of the Trading Nation? If you'd like to call into our live Wednesday show, email your name, number, and a question to TradingNation@cnbc.com


Trades to Watch

Trader Bios


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 CNBCand 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

Read more