If junk bonds slip, a big market drop will be ahead: Technician

The high-yield bond market and stocks tend to track each other closely. And for that reason, on technical analyst says a drop in the former could lead to a big slide for the latter.

"When the high-yield bond market has peaked, it's led to severe downturns we've seen in the S&P 500," Frank Cappelleri, a trader and technical analyst at Instinet, said Friday on CNBC's "Trading Nation."

Over the past five years, the correlation between the daily moves of the S&P 500 and the high-yield bond ETF (HYG) has been 0.73, indicating a particularly close relationship. This makes sense for economic reasons, given that both stocks and high-yield bonds should tend to rise as the economy gets better (making likely profits higher, and decreasing the risk of default).

"Right now, the HYG ETF is only about 2 percent below its recent high," which is "not alarming by any means, but we have to watch this relationship closely, based on the past."


"A downturn in the equity market could come as soon as we lose that bid in the high-yield bond market," Cappelleri warned.

For her part, Erin Gibbs of S&P Investment Advisory sees little reason for stocks to rally no matter what the high-yield bond market does.

"The equity market could be stuck in a trading range for some time until we see a catalyst to push the markets higher or lower," Gibbs wrote to CNBC on Friday.

Read MoreThe Trade: What junk bond rally means for stocks

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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.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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