‘I love energy,’ says trader who sees tremendous buying opportunity in the space

Energy stocks have been slammed over the past week as volatility returned to Wall Street. The XLE Energy ETF may have gotten a bad rap, though, according to two market watchers who see a potential buying opportunity amid the weakness.

"You want to buy the oil names here. I love the XLE," said Larry McDonald, founder of the Bear Traps Report, in an appearance Wednesday on CNBC's "Trading Nation."

The conditions are ripe for a bounce in energy, he said, as the bond rout this year and stocks' sell-off shuffled money into different assets.

"Bonds are in flames and the money has to go somewhere. It's going to come out of this passive strategy – risk-parity bonds – and it's going to move into commodities," McDonald said.

The bond market has seen a frenzy of activity this year as a faster inflation outlook and higher expectations for a more aggressive Federal Reserve sent prices plummeting and yields spiking. The yield on the 10-Year Treasury neared 2.9 percent on Thursday after topping 2.8 percent a week ago for the first time in four years. The yield has not hit 3 percent since January 2014.

Matt Maley, equity strategist at Miller Tabak, is also bullish on the XLE, a sector he believes could outperform even if oil prices take another step lower.

Crude "could drop down into the mid-$55-57 range and the XLE would still be fine because it's sold off in advance of that," he told "Trading Nation." "The energy stocks will have another leg higher, maybe a lot higher."

The energy sector sold off this week as oil prices gave back the bulk of their year-to-date gains. So far this week, both the energy sector and oil have fallen more than 5 percent.

However, for the year, the losses in energy have outpaced crude. Oil is up less than 1 percent in 2018, while energy has fallen 6 percent. The ETF is on track for its worst monthly performance since December 2015.

The technicals also support an energy comeback, according to Maley. Even in the grip of the sell-off, the ETF came close to its 200-day moving average, but did not break below that line.

Energy stocks remained under pressure on Thursday as oil prices react to another rise in domestic production. The Energy Information Administration reported Wednesday that U.S. output increased by a record 332,000 barrels a day to 10.251 million. The EIA anticipates average U.S. production of 10.6 million barrels a day in 2018 and 11.2 million barrels in 2019.

Higher U.S. production undoes some of the good from an output cap agreement among OPEC and other oil-producing nations. That deal is set to expire at year-end.

Oil prices were down 1.6 percent to $60.84 a barrel as of late Thursday morning after settling at their lowest level since Jan. 8 on Wednesday. The XLE dropped 1.4 percent after a nearly 2 percent decline a day earlier.

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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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