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What the market is missing about energy stocks

The market has energy stocks all wrong
VIDEO2:2102:21
The market has energy stocks all wrong

As crude oil prices have slid, energy stocks have badly outperformed the rest of the market. But according to Carter Worth of Sterne Agee, that could actually present an attractive opportunity to buy into the energy sector.

As of Monday morning, crude oil futures are down 13 percent from the intraday high they made back in June. That hasn't been good for the S&P energy sector. The only sector that fell last week, the energy sector has also been the worst-performing sector over the past month, underperforming the by 2.5 percent.

But Worth, Sterne Agee's chief market technician, has spotted an interesting trend. Looking back 25 years, he notes that there have been 203 instances when WTI crude oil has fallen more than 15 percent over 12 weeks, and the S&P energy sector has also underperformed during that period. So what happened after that? Over the month that followed, the energy sector actually outperformed the S&P by 0.41 percent on average. Over the three months that followed, the energy sector tended to outperform by 1.99 percent. And over a five-month time period, the energy sector has beaten the broader market by 2.63 percent.

"That's statistically significant, no other way to categorize it," Worth said. "And we think that's an important backdrop here, because you've had a nice sell-off in crude."

On Friday's "Options Action," Worth burnished his point by furnishing a chart of the SPDR Energy Sector ETF (which trades under the ticker symbol XLE).

Pointing to the "four important intermediate declines of the last two years," Worth noted that both the magnitude of the declines (8 percent, 9.5 percent, 7.5 percent and 7 percent) and their duration (22 sessions, 23 sessions, 22 sessions, 32 sessions) make them "remarkably similar."

"The principles are that after a sell-off, you get a bounce, you get a bounce, you get a bounce, and we're playing for a bounce here based on this chart and based on what history tells us," Worth said.

Read More Why some investors think oil's bull run is done

Finally, Worth pulled out a long-term chart of the energy sector ETF.

Currently trading at about $96.50, the ETF is still above its 2008 high of $91.42, and that is "where support comes into play," Worth said.

His bottom line?

"Both here, and on any further weakness, we think the XLE and the energy sector stocks are a good bet."

Read More Brent cracks $102 as sell-off accelerates, Libyan output weighs

Michael Khouw, primary strategist at Dash Financial, agreed with Worth's call.

"I like taking a look at potentially bullish bets when everybody else is throwing them in the garbage," Khouw said on Friday. "That's kind of the situation where you look for some kind of a snap-back."

To make a bullish bet on the XLE, then, Khouw recommends buying the December quarterly 95-strike call for $4.

But not everyone was on board with the contrarian call.

"I think the momentum's broken," said Dan Nathan of RiskReversal.com. "The XLE had a 22 percent rise from the low in February, and it just broke the uptrend that's been in place here."

Nathan added that he doesn't like the idea of owning options "in a sector where I think the momentum is waning."


—By CNBC's Alex Rosenberg.

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