This sector will come roaring back: Top technician
Energy stocks have badly lagged the S&P 500 this year, but one top technician suggests that a turnaround is ahead. Carter Worth, the chief market technician at Oppenheimer, is upgrading the sector to "overweight" from "equal weight," saying that energy stocks are now set up for a strong rally relative to the broader market.
"The relative underperformance of the sector compared to the market is reaching extreme levels on a rolling two-year and five-year basis," Worth wrote in a Monday note. "Most key sectors at this point have exceeded their respective all-time highs of 2007 or 2008, as all will know, and the presumption is that energy is setting up to do so as well."
Worth had rated the energy sector "equal weight" at the beginning of the year, reserving the "overweight" designation for health care, consumer discretionary, industrials and financials—the four sectors which, indeed, have turned out the strongest performances in 2013 thus far.
But Worth is now changing his tune, noting the "extreme underperformance" of the energy sector over the past five years.
Worth suggests that the sector will now begin to outperform.
"What's important is that energy is the worst-performing sector off the lows of this bull market, meaning, a real underperformer," Worth said on Friday's episode of "Options Action." "And that's what we think the opportunity is for the group."
(Read more: Global growth will energize energy sector: US Trust)
Worth sees similarly bullish indicators in individual energy stocks, most notably Exxon Mobil.
"What does it say about the energy complex," Worth asks rhetorically in his note, "when the most important energy stock in the world is at a 'conventional' buy juncture, toying with the prospects of a breakout-type move to new 52-week highs?"
Worth points out the strength of the Exxon Mobil chart.
Yet what of crude oil, which has suffered a miserable three months since hitting a high in late August?
"The recent 12-week collapse in WTI Crude from $111.50/barrel in late August to $92.50/barrel in late November is not a negative for energy stocks, history suggests, but rather is a good setup for a mean-reversion trade for the sector," Worth writes.
He has the data to prove it. In the past 25 years, there have been 203 times in which crude oil has declined by 15 percent or more in a 12-week period while the energy sector underperformed in the same time frame. The energy sector has consequently tended to outperform the S&P in the following month, two months, three months, four months and five months (by 0.41 percent, 1.13 percent, 1.99 percent, 2.44 percent and 2.63 percent, respectively).
(Read more: Crude pares losses as market digests Iran accord)
The evidence is "statistically significant, no other way to categorize it," Worth writes.
His overall advice is simple.
"For those underweight energy at present, we would get 'on sides.' For those already overweight, we would stay the course. And for those looking at a relative trade, we would be short the S&P 500 itself and would pair said position with longs in the US or global energy complex," the technician concludes.