Despite starting off the year strong, energy stocks have lagged the broader market rally over the last month. Now, some market watchers are becoming more bearish on the underperforming sector. They say that investors are likely to trim positions in individual energy stocks as well as ETFs such as the Energy Select Sector SPDR ETF (XLE), which tracks the industry's biggest players, including Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Occidental Petroleum Corp. (OXY), Marathon Oil Corp. (MRO), ConocoPhillips (COP), Schlumberger Limited (SLB) and Valero Energy Corp. (VLO).

"I think we're going to see energy sold, and that money is going to rotate into other areas where there's more momentum in the market," said Piper Jaffray's Craig Johnson, per a story in CNBC. Johnston says investors should reduce their exposure to the XLE energy ETF.

7 Energy Stocks That Face Declines

(Piper Jaffray Says Trim XLE ETF Stocks)

  • Exxon Mobil Corp.
  • Chevron Corp.
  • Marathon Oil Corp.
  • Occidental Petroleum Corp.
  • ConocoPhillips
  • Schlumberger Limited
  • Valero Energy Corp.

Source: CNBC

Energy Relief Rally

The XLE suffered a nearly 4% loss last week, its worst weekly performance of the year. While the index is still up more than 13% year-to-date (YTD), versus the S&P 500’s 11.5% return over the same period, Johnson views the comeback as a “relief rally,” or a temporary break in selling, arguing that the sector's recent gains aren’t tied to underlying strength.

BK Asset Management’s Boris Schlossberg echoed the downbeat sentiment on energy, suggesting that energy’s fate is now directly tied to a potential trade deal with China. “I think the XLE story is really the China oil story at this point,” said Schlossberg, warning that “an unwind of the China trade story” would be disastrous for the XLE.

Looking Ahead

Not all are so bearish. Countering the pessimistic view on energy is JPMorgan's global head of quantitative and derivatives strategy Marko Kolanovic, who says energy is one group that may surprise and rebound, per Business Insider.

“If the trade war is resolved, we could see another market-wide leg up, and energy could catch up,” said the quant strategist. He said that market technicals look positive for energy players, noting that if oil moves up $5 a barrel on a trade deal, “that would go a long way to change positioning.”