There's a warning sign flashing for stocks, but it's not coming from the equity market. Instead, it's coming from the bond market.
High-yield bonds, which often serve as a proxy to where the stock market is going, has been selling off sharply, with the two largest high-yield bond ETFs, the and , trading at the lowest level since November 2011. And according to one expert, the recent pullback is a noteworthy sign of what's to come for stocks.
"If you look back to [past] selloffs, when the high-yield market dramatically underperforms in a short period of time, it's a very good warning sign for equities," Larry McDonald said Wednesday on CNBC's "Trading Nation." Since the market's last significant pullback in October 2014, the S&P 500 and HYG have seen a substantial divergence, as the S&P 500 is up more than 9 percent and the HYG is down nearly 5 percent.
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"If you look back to 1996, [the underperformance of high-yield] has been a correct warning sign about 72 percent of the time in terms of being a predictive indicator of an equity selloff," said McDonald, head of U.S. macro strategies group at Societe Generale.
But from a purely technical perspective, Todd Gordon of TradingAnalysis.com said there's nothing to worry about. "If you look at a chart of the HYG and the S&P 500 going back to 2013 you see that high-yield has really underperformed," the CNBC Contributor said in a "Trading Nation" segment. "If you weren't long equities because of the performance in high-yield, you really missed out on a spectacular rally."
And while McDonald didn't refute Gordon's notion, he did stress the importance of looking at the acceleration of the deterioration of high-yield rather than the long-term performance. "Looking at the long-term spread isn't going to tell you much," he added.
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