The Broader Implications of Alcoa Inc (AA) Earnings

Alcoa Inc (NYSE:AA) will take its turn in the earnings confessional after tonight's close

Jul 8, 2015 at 8:22 AM
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Second-quarter earnings season will unofficially get underway when Alcoa Inc (NYSE:AA) steps up to the mic after tonight's close. The stock has had a negative earnings reaction in each of the past three quarters, averaging a loss of 3.3%. This time around, the options market is expecting a 5.4% swing -- based on AA's near-term at-the-money straddle -- and considering the weekly 7/10 11-strike call is pricing in higher implied volatility than the put (76.2% vs. 73.7%), it appears the action is expected to resolve itself to the upside.

Does the reaction to AA's earnings report have any impact on the broader equities market? Schaeffer's Senior Quantitative Analyst Rocky White ran the numbers to see how the broader S&P 500 Index (SPX) has historically performed in the wake of the scheduled event, based on a positive or negative post-earnings performance from AA.

Per the chart below, in the 16 times AA has had a positive earnings reaction since 2005, the SPX has gone on to average a 10-day return of 1.2%, and is positive 88% of the time. Going out three months, the SPX averages a gain of 3.5%, and is positive 69% of the time.

Meanwhile, in the 25 times AA has had a negative earnings reaction, the SPX has averaged a much slimmer 0.3% advance, and is positive just 56% of the time. The results are even more uninspiring looking out three months. Specifically, the SPX averages a 0.05% loss, and is positive less than three-fifths of the time.

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Technically speaking, it's already been a dismal year for AA. In fact, not only are the shares off almost 30% in 2015, but they hit an annual low of $10.58 yesterday, before settling at $11.06.

Another poorly received turn in the earnings confessional may have option bulls or analysts changing their tune -- which could send AA to fresh lows. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, the security's 10-day call/put volume ratio of 5.25 ranks in the 80th annual percentile. Simply stated, calls have been bought to open over puts at a faster-than-usual clip.

Meanwhile, although some analysts have started re-evaluating their outlook on Alcoa Inc (NYSE:AA), more than 36% still maintain a "buy" or better rating on the equity. Plus, the average 12-month price target of $15.37 stands at a 39% premium to last night's close. In other words, the door is wide open for a round of downgrades and/or price-target cuts.

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