Crude oil prices continue to draw strength from an improving economic outlook. Last week, the U.S. government reported that the economy expanded at a faster-than-expected rate of 3.5% in the third quarter, marking an unofficial end to the recession. Gross domestic product (GDP) grew at its quickest pace in two years. Crude futures responded by soaring more than 3%, within reach of another annual high. What's more, crude prices have more than doubled from their Dec. 24 low of $35.13 per barrel.
The oil services sector has wasted no time in capitalizing on this strength, with the Oil Service HOLDRS Trust (NYSE: OIH, Stock Forum) soaring more than 59% since the start of the year. What's more, OIH continues to rally along the support of its 10-week and 20-week moving averages. The trust is currently rebounding off key support near the 120 region, which is home to a 38.2% Fibonacci retracement of its July 2008 peak and its December 2008 low.
Within the OIH, ENSCO International Inc. (NYSE: ESV, Stock Forum) has emerged as an outperforming equity. The firm performs contract drilling of oil and gas wells, according to Hoover's, and owns a fleet of 46 offshore rigs, including 43 jack-ups, one barge rig, and two ultra-deepwater semi-submersibles. ENSCO conducts most of its drilling business in the Asia/Pacific region, but also drills in Europe, Africa, and North and South America.
Technically speaking, the stock has soared more than 62% since the start of 2009. The security has staged an impressive rally from its March low of $22.04, gaining ground along the support of its 10-week and 20-week moving averages. What's more, the stock is trading back above its 10-month and 20-month trendlines for the first time since August 2008.
The shares were rejected by overhead resistance at the round-number 50 level in late October, and were pressured sharply lower by a downturn in the broader market. However, ESV is currently in the process of rebounding from support at its 10-week moving average. The stock now appears poised to make another run at the 50 area.
Despite the security's stellar technical performance, we continue to see signs of excessive pessimism among investors. In the options pits, data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) point toward a wealth of put buying. Specifically, ESV's 10-day put/call volume ratio of 7.54 indicates that puts bought to open have numbered calls purchased by more than seven to one during the prior two weeks. This ratio also ranks above all but 1% of those taken in the past year, meaning that traders have rarely snatched up put options at a faster pace in the past 52 weeks.
Checking in with ESV's open interest configuration, we find that peak put open interest for the November series of options resides at the out-of-the money 45 strike, which sports more than 4,600 contracts. By comparison, peak call open interest for the November series totals a mere 3,300 contracts at the out-of-the-money 50 strike. This preference for out-of-the-money puts indicates that options traders are not looking for ESV to rally much higher.
Outside the options pits, short sellers have also stocked up on bearish bets. Roughly 3.8 million ESV shares are sold short, representing 7.2% of the stock's total float. That said, it would appear that some of these bears are beginning to have second thoughts, as short interest declined by 4.3% during the most recent reporting period. Should this short-covering trend continue, we could see ESV buoyed by the added buying pressure.
Finally, Wall Street has yet to acknowledge the stock's impressive technical performance. Currently, 17 of the 21 analysts following ESV rate it a "hold" or worse, according to Zacks. Any upgrades from this negative bunch could result in additional upward momentum for the equity.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column.
