Could Alcoa Inc's (AA) Earnings Reaction Set the Tone For the End of 2015?

Aluminum giant Alcoa Inc (NYSE:AA) will step into the earnings confessional tomorrow night. Historically, AA has marked the unofficial start of the quarterly earnings season -- but has the company's earnings reaction been a bellwether for the broader equities market? Let's find out. 

AA has suffered more negative than positive earnings reactions since 2005, with 25 of the former and 17 of the latter, per Schaeffer's Senior Quantitative Analyst Rocky White. Or, simply put, about 50% more negative than positive next-day reactions.

The stock's biggest one-day post-earnings gain came in April 2012, when AA enjoyed a 6.2% jump.  The stock's worst reaction was in October 2008 -- the height of the financial crisis -- with the shares surrendering nearly 12% in the subsequent session.

Following a positive AA earnings reaction, the broader S&P 500 Index (SPX) has averaged a higher short-term return, and the odds of being positive edge higher, too. Specifically, after a well-received Alcoa earnings report, the S&P has averaged a two-week return of 1.3%, and has been higher 88% of the time. On the flip side, the S&P has averaged a two-week return of just 0.3% following a poorly received AA report, and has been positive just 56% of the time. 

Going out even further, the SPX has averaged a three-month return of 3.5% in the wake of a solid AA report, and has been positive 69% of the time. That's much better than the SPX's stats after a dismal AA report, with the index averaging a three-month loss of 0.05%, and positive just 56% of the time.

So, what are the expectations for AA ahead of tomorrow night's report? Options traders are pricing in a 6.4% move in either direction, per the stock's near-term at-the-money straddle. For comparison, AA has averaged a slimmer single-day post-earnings move of 3.4% over the past eight quarters, and has been positive half the time. 

As far as sentiment, it looks like option buyers are betting on a negative reaction this go-round. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity sports a 10-day put/call volume ratio of 0.95 -- in the 84th percentile of its annual range. In other words, option traders have purchased AA puts over calls at a much faster-than-usual clip during the past two weeks. 

Short-term traders are paying historically healthy premiums, too. The equity's Schaeffer's Volatility Index (SVI) of 56% sits higher than 87% of all other readings in the past year, suggesting AA options are pricing in bigger-than-usual volatility expectations. 

The round-number 10 strike has grown increasingly popular among put players over the past 10 sessions. The weekly 10/9 10-strike put has seen open interest increase by more than 6,400 contracts, while the October 10 put has seen an increase of more than 5,500 positions. Those who purchased the contracts to open expect AA to breach $10 within the options' respective lifetimes (the weekly contracts expire at the end of this week, while the standard contracts expire at the close on Friday, Oct. 16). 

On the charts, AA spent the past couple of months in single-digit territory -- touching an annual low of $7.97 on Aug. 24 -- but rocketed higher with the broader equities market last week. The shares were last seen 0.1% lower at $10.97, but maintain a healthy month-to-date gain of 13.6%. 

Off the charts, Alcoa Inc (NYSE:AA) recently announced plans to split into two publicly traded companies. This morning, AA said it scored a massive $1.1 billion contract to supply titanium for F-35 fighter jets made by Lockheed Martin Corporation (NYSE:LMT).