As energy stocks show rare strength, trader warns it’s still too risky to jump into the space
Energy stocks are showing rare strength this week as oil rallies.
The XLE energy ETF is up 4% over the past two days, though remains down nearly 50% this year. The sector is easily the worst performer in 2020.
Todd Gordon, founder of TradingAnalysis.com, said the group could slowly be turning a corner as the economic situation during the coronavirus pandemic recovers.
"XLE has been underperforming the S&P since 2015, a chronic underperformer [but] we're starting to see the fundamentals improve," Gordon told CNBC's "Trading Nation" on Monday. "Jet fuel represents about a third of the refined product that comes from a barrel of oil so as air travel returns, these stocks should eventually improve as well."
While the demand side recovers, Gordon still sees the supply side putting pressure on the energy stocks.
"The pace of recovery is still slow. We have a major oversupply issue," he said. "We have oil above the five-year band, so we have massive oversupply which is keeping the lid on those stocks."
"Right now I think it's just too much like catching a falling knife. In the long term, however, once we get on the other side of Covid, I think you might see recovery here in the energy sector," said Gordon.
Chad Morganlander, portfolio manager at Washington Crossing Advisors, is also taking a cautious approach when dealing with energy stocks.
"We're still underweight the sector, but if you look beyond, say for example, nine to 12 months, we would be more opportunistic in buying the sector with exposure to an index fund or an ETF," Morganlander said during the same segment.
He also anticipates an improvement in economic activity to provide a tail wind for energy stocks.
"We believe that as you start to move towards 2021 and economic activity starts to pick up, due in part because perhaps we get a Covid vaccine, then you'll start to see oil prices move in a commensurate fashion into 2022 where you can get oil at $60 a barrel – therefore, you can get a positive lift within the oil and gas complex overall," he said.
Crude was trading at around $40.30 a barrel on Tuesday.