Transocean, Baker Hughes Could Be In for a Seasonal Speed Bump

Energy stocks Transocean LTD (NYSE:RIG) and Baker Hughes Incorporated (NYSE:BHI) have historically underperformed in December, despite the month's bullish bias

Nov 30, 2016 at 10:41 AM
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The S&P 500 Index (SPX) is on pace to wrap up November with an impressive 4% monthly gain, and head into the historically bullish month of December. And while several stocks tend to participate in a Santa Claus rally in December -- including these two notable insurance issues -- Schaeffer's Senior Quantitative Analyst Rocky White unveiled a list of 25 SPX stocks that typically underperform in the last month of the year, including rig operators Transocean LTD (NYSE:RIG) and Baker Hughes Incorporated (NYSE:BHI).

worst december SPX stocks

RIG is up 11% at $12.24 today, as energy stocks rally on reports major oil producers have reached an agreement to limit global output. Nevertheless, the stock is stalling out near its year-to-date breakeven mark, and, if past is precedent, RIG could see more technical troubles ahead. Specifically, in the past 10 years, the equity has turned in a positive December performance just three times, averaging a monthly loss of 6.3%.

In the options pits, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have shown a preference for long calls over puts of late. RIG's top-heavy 10-day call/put volume ratio of 3.36 ranks in the 74th annual percentile. It's a similar set-up today, with roughly 15,000 RIG calls on the tape -- three times times the average intraday pace. The stock's weekly 12/2 12.50-strike call is among the most active options, where it looks like new positions are being purchased.

However, with more than one-quarter of the equity's float sold short, some of this call buying could be a result of short sellers hedging their bearish bets against any upside risk. Regardless, now is an opportune time to purchase premium on RIG's short-term options. The equity's 30-day at-the-money implied volatility of 54.5% ranks below 77% of comparable readings taken in the past year, while its Schaeffer's Volatility Index (VIX) of 58% arrives in the 25th annual percentile. Summing it all up, low volatility expectations are currently priced into Transocean LTD's near-term options -- a potential benefit to options buyers.

BHI is also participating in today's sector-wide surge, up 4.7% at $63.35 -- and fresh off an annual high of $63.81. While the oil stock now boasts a year-to-date advance of over 37%, a seasonal speed bump could be on the near-term horizon. Over the past 10 Decembers, BHI stock has been positive just 30% of the time, averaging a loss of 3.2%. Plus, today's surge has the equity's 14-day Relative Strength Index (RSI) at 69 -- on the cusp of overbought territory -- suggesting a short-term breather may be in the cards.

Amid relatively low absolute volume, options traders have been betting on more upside for BHI at a faster-than-usual clip, too. At the ISE, CBOE, and PHLX, the stock's 50-day call/put volume ratio of 2.34 arrives in the elevated 83rd annual percentile. In the front-month series, peak open interest is found at the December 70 call -- with 3,002 contracts outstanding -- and according to the major options exchanges, the bulk of this activity has been of the buy-to-open kind. In other words, traders expect BHI to break out above $70 by options expiration at the close on Friday, Dec. 16.

This optimism toward Baker Hughes Incorporated is seen outside of the options pits, as well, where the majority of analysts covering the shares maintain a "buy" or better rating. Plus, just 2% of the stock's float is sold short, or 1.6 times BHI's average daily pace of trading.

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