NEW YORK ( TheStreet) - In third quarter earnings, the themes that played out among oil service stock like Schlumberger ( SLB), Halliburton ( HAL), Baker-Hughes ( BHI) and Weatherford International ( WFT) were straightforward:
Oil service stocks are a basket trade come earnings.
Event-driven traders like to sell these stocks "on the news" and take profits.
North American market conditions were strong, as expected.
International market recovery remained an open question.
Sector fundamentals included cyclical upside, and oil service stocks levered to the trend.
Yet even though analysts and investors expected North America to be the bright spot in the third quarter -- and for the international outlook to remain open to debate -- when the stocks followed through on these themes exactly in the numbers and the commentary, the oil-service basket stock trade was a selloff. What's more, after the selloff, the stocks rallied to new 52-week high levels. There's a fair chance this dynamic plays out again in the oil service stocks as earnings season kicks off with Schlumberger fourth quarter earnings on Friday. Schlumberger always sets the trend for the sector, as it's several times the size of any of its competitors. The dichotomy between strength in North America and uncertain recovery internationally remains the fundamental thematic divide for the oil-service stocks. Since in the previous quarter this was the case, and the stocks still sold off after the companies reported more or less in line with expectations, what's the difference maker this time around? For one, all the oil service stocks rallied to end 2010, hitting fresh 52-week highs at year-end, and even though the rally has abated a bit and the stocks come down from those 52-week high levels, there's still plenty of room for profit-taking "on the news" from the event-driven traders when Schlumberger reports on Friday. The price of crude may be taking it on the chin on Thursday -- with Schlumberger notably the leader among intra-day losers in the group -- but that's less an issue for the oil-service stocks than the tone they set about international markets and earnings in 2011 and 2012, says Colin Gerry, analyst at Raymond James. Gerry thinks that as long as oil is trading somewhere between $80 and $100, there's general confidence in the markets. It was when oil jumped from $35 to $70 that investors were questioning whether the business fundamentals really supported the rally, but that's no longer an issue, meaning that the "North America vs. international market" dichotomy and the profit-taking impulse for stocks still near 52-week highs are the catalysts for earnings action.