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The market is about to lose its leader: Traders

Stocks have made a major comeback over the last month, but some traders say that one of the leading groups in the recent rally is set to run out of steam.

The S&P 500 energy sector has been leading the market gains, rising 8 percent in March as the broader S&P has risen 5 percent. Unfortunately, as energy stocks have gone up in price, they've skyrocketed in valuation, according to Erin Gibbs of S&P Investment Advisory.

Gibbs said the S&P energy sector looks extremely expensive given an expected 60 percent earnings contraction for 2016, trading at a price-to-earnings ratio of 70 times expected forward earnings. This is in steep contrast to the S&P 500, which is trading at about 17 times forward earnings.


While a pop in oil prices may drive the sector higher, Gibbs said dismal profits and high amounts of debt will continue to weigh on energy companies longer term.

"I have some real concerns about these companies' being able to trade at these valuations, even if gas and oil recover," she said Wednesday on CNBC's "Power Lunch."

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Looking at the SPDR energy sector ETF (XLE), Todd Gordon of TradingAnalysis.com agreed that the levels at which energy stocks are trading appear unsustainable.

Among the technical warning signs, Gordon noted that energy stocks have reached a 62 percent retracement level at which stocks should see technical resistance. Another potential concern is the ETF's inability to cross above its 200-day moving average.


And with energy the best performing sector of the S&P 500 over the past month, Gordon said potential weakness in energy names may translate into trouble for the broader market as well.

"It looks like the leader in this market has failed," he said Wednesday in a "Trading Nation" segment. "We could see some downside to come."

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

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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.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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