A leading indicator for stocks is waving a yellow flag for the market

As stocks sit near record highs, one leading indicator for the market is flailing, and that could be a major warning sign.

The high-yield market was left out in the cold this January. Where the S&P 500 saw its best monthly gains in nearly two years, the HYG high-yield ETF spent much of the year flat before selling off this week.

Miller Tabak's Matt Maley sees high yield's lack of participation in the rally as a warning signal.

"It is a yellow flag," Maley told CNBC's "Trading Nation." "The high-yield market was dead flat, the HYG was dead flat in January and yet the stock market had a real good gain."

This divergence between the stock market and the high-yield corporate bond market has been happening for more than a year, Maley noted. High yield and stocks are normally highly correlated and the HYG ETF often acts as a barometer for strength in the stock market.

That relationship appears to have broken down in 2017 with equities breaking records and high yield struggling for even a small gain. The S&P 500 ended 2017 with 12-month gains of 19 percent, its best performance since 2013. The HYG ETF, meanwhile, added just 0.8 percent. That marks its smallest one-year move since 2013 and weakest yearly gain on record.

Maley does see stocks and the high-yield market moving back in sync in eventually. The two moved in tandem this week as Wall Street suffered its worst sell-off in more than a year. The S&P 500 is on track to close down 1.7 percent for the week, its worst performance since April, while the HYG ETF fell 1.1 percent for the week in its worst since August.

Those kinds of losses in the HYG are not a major worry but do cause concern, he said. Maley is watching the 200-day moving average on the HYG chart closely. Over the 18 months through to November, the ETF found support in that level. It now serves as resistance.

What would raise his alarm is if it breaks below its March 2017 low of $86.11, which he considers the next level of support.

"If it breaks down below its 2017 lows, it's going to change from a yellow flag to a big, red flag," said Maley.

Near-term trading presents a "key technical juncture," Maley said. The HYG ended Thursday's session at 86.77, less than 1 percent above the March low.

If it takes out that low, it would mark a critical "lower low" for high yield and a negative for broader markets.


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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 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

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