Two ominous signs are flashing a red light for one very important area of the market — and that could mean trouble down the line for equities.
First, he pointed out that a death cross has formed on the chart of the HYG, the ETF that tracks high yield. "This is a momentum indicator that things could be moving lower," he said. Technicians see this sort of pattern as a bearish reversal in trend. Market participants often look to the high-yield market as a leading indicator of where equities could go next. The last two sell-offs in the stock market were preceded by a decline in the HYG.
Furthermore, the RiskReversal.com founder noted that there has been an increase of bearish bets in the options market on the HYG — with one trade in particular raising eyebrows.
In the large wager, one trader purchased 22,500 of the December 75-strike puts for $1.33 each. Since every options contract accounts for 100 shares of stock, this is a $3 million bet that the HYG ETF could fall below $73.67, or more than 11 percent by the end of the year — levels the HYG has not seen since the financial crisis.
"If you are looking to play for a disaster later on in the year, this is one way to play it looking at defined risk," said Nathan.