Gibbs projects that earnings for the materials sector will contract 5% over the next 12 months. Moreover, the sector is trading at relatively rich valuations compared to others at 7.5 times projected earnings.
Boris Schlossberg of BK Asset Management also pointed to potential weakness in oil exploration ahead. After the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) rallied over 16% this quarter, Schlossberg warned investors to stay away.
“They’re going to get squeezed both from the fact that oil stays low … and that rates go up and they’re all very overleveraged,” Schlossberg said, referring to the debt on those companies’ balance sheets. “Any rally in XOP is pretty much an opportunity to sell.”
More aggressive traders may jump on the negative oil exploration outlook with the recently launched Direxion Daily S&P Oil & Gas Exploration & Production Bear Shares (NYSEArca: DRIP), which takes the -3x, or -300%, daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
For more information on the market sectors, visit our sector ETFs category.
Max Chen contributed to this article.