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Bet on these two sectors for a breakout on earnings, traders say

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Why this analyst says communications sector could rally

Which sectors will lead the way as markets near record highs?

After the busiest day of earnings season, the S&P 500 is less than 1% away from all-time highs, and traders are placing their bets on which sector is poised to break out. Todd Gordon, founder of TradingAnalysis.com, is banking on the communications sector's ETF XLC.

"We're seeing a rotation into XLC. We've already seen the move in technology. I think that communications is the sleeper," Gordon said Thursday on CNBC's "Trading Nation." "I like XLC as sort of a catch-up trade to what technology has already done."

Technology is the best performing sector this year, surging over 32%. The communications sector has stayed on par with the S&P, rising about 21% since January, but Gordon is looking for a breakout.

"If we look at the chart right now, you can see, much like this overall market, we've been in a lot of consolidation, a lot of back and forth. Higher lows, lower highs, a lot of frustration," he said. "I do think this consolidation resolves in the direction of the trend, … which should be up. So, through about $52, watch that XLC." It closed Thursday at $49.93. 

Gordon mentioned that two of the top 10 holdings for the sector, Netflix and Comcast, have already reported and beat on earnings, while the rest have strong-looking charts with favorable outlooks. He said one name could even near its all-time high after reporting earnings next week.

"One trade, if you want to play one of the biggest holdings, is Alphabet. Earnings are coming out on [Oct.] 28th, again, very similar pattern here," he said. "[It's] really just a stone's throw away from an all-time high. … When you try once, twice, three, four times to get through a level, there's a chance that the buyers are going to take us through."

John Petrides, portfolio manager at Tocqueville Asset Management, is eyeing a different sector to beat the market over the next year.

"I think, over the next 12 months, the energy sector could be one of the better-performing or outperforming in the S&P. I mean, it's less than 5% of the overall index, which is unbelievable to think where we were 10 years ago," said Petrides.

Energy is the worst performing sector in the S&P, having gained only about 3% for the year, but Petrides thinks it could be the big winner over the next year. In particular, he drew attention to the stocks of exploration and production companies, tracked by the SPDR S&P Oil & Gas Exploration & Production ETF XOP.

"I think [those] are the most attractive here, assuming we get a deal with China," he said. "You're seeing production slow down, which should hopefully tighten supply-and-demand dynamic, and post the 2016 collapse in oil prices, most of these energy companies have become really good capital allocators focusing on repairing the balance sheet and returning cash to shareholders. So I think at current value, the energy sector is under-owned, and I think there's a lot of catalysts to drive to the upside."

The XLC lost more than 1% in Thursday's trading session. The energy sector select ETF XLE and XOP shed less than 1%.

Disclosure: Todd Gordon owns shares of the XLC, XLK and Alphabet.

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