GO
Loading...

Why April’s best sector could keep soaring in May

Energy has been the best-performing S&P 500 sector in April, rising 4.7 percent. And one of Wall Street's top technical analysts says the energetic performance is set to continue.

"Now that the sector has exceeded its 2008 high, the presumption is that the breakout that's underway will continue," Sterne Agee chief market technician Carter Worth wrote in a Monday note.

Calling the trend "steady, orderly" and "hard to argue with," Worth predicts that "another 6 percent to 8 percent upside is reasonable."

And when it comes to the best way to play it, Worth looks to oil behemoth Exxon Mobil.

"What's interesting here is that the entire group represents 10.5 percent of the S&P 500, 55 names, yet three names are half the weight of the sector—Exxon, Chevron and Schlumberger," Worth said on CNBC's "Options Action" on Friday. "And Exxon has really lagged, and we think that's the opportunity."

Worth notes that Exxon "is really trailing the aggregate, trailing the sector by a considerable margin. And at some point, that is not sustainable. In some cases, you're talking about underperformance by about 50 percent."

But because he has immense respect for Exxon's north-by-northeast chart pattern, Worth thinks that Exxon will catch up to the sector, rather than the sector falling to meet its biggest name.

Read More Don't laugh: There's logic behind 'sell in May'

"We think the opportunity here is to play Exxon for some catch-up," he said.

Worth points out that after a selloff, the stock is getting back to its December highs.

Furthermore, the stock is closing in on its all-time highs.

"This is quite a well-defined level," Worth said. "We are toying with the prospects of breaking out above the tops of '07, '08. Very interesting moment for Exxon."

To take advantage of such a move, Michael Khouw of Dash Financial recommends buying the Exxon October 100-strike call for $3.50, which gives him unlimited upside potential above $103.50, but only exposes him to $3.50 worth of risk per share.

Read More Oil rises above $110 on Ukraine, Libya supply worries

However, Dan Nathan of RiskReversal.com is distinctly not on board with the call.

"I can't agree with the thesis whatsoever," Nathan said. "We are in the fifth year of this global recovery here. And oil has gone berserk because of this geopolitical stuff. And that may continue for a while here. But if global growth starts to slow," it could spell big trouble for the energy sector and for Exxon in particular, given that "there's no earnings growth here, and sales growth is declining."

Disclosure: Carter Worth does not own stock in the companies mentioned.

Follow the show on Twitter @CNBCOptions.

Contact Options Action

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Latest Video

Options Action Daily Reports

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.

You Make the Call

  • Mike Khouw, Options Action trader, shares his view on News Corp stock on the heels of testimony from Rupert Murdoch before British Parliament.

  • Do you have a question for the Options Action team? Options Action selects a viewer's question and gives the answer on the show's Make The Call Web Extra video.