2 Commodity Stocks to Short

AA and BHGE have been rebounding in recent weeks

Sep 9, 2019 at 12:56 PM
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Alcoa Corp (NYSE:AA) stock is up 5.9% at $20.23 today on news the aluminum producer announced restructuring efforts that include streamlining its operating model to seven direct reports to CEO Roy Harvey, down from 12. Today's upside could be short-lived, however, with AA stock rallying into a trendline with historically bearish implications.

Specifically, AA is now within one standard deviation of its 40-day moving average after a lengthy stretch below it, defined as being south of the trendline 60% of the time in the last two months, and in eight of the past 10 trading days. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, in the 12 other times this signal has sounded in the previous three years, Alcoa stock was down 4.5%, on average, one month out, with three-quarters of the returns negative.

AA stock is already down 24% year-to-date, and short sellers have been piling on. Short interest jumped 24.7% in the most recent reporting period to 9.28 million shares. This represents a slim 5% of the equity's available float, though, meaning the bearish bandwagon is far from full. Additional short covering could create more pressure for Alcoa stock.

aa stock daily price chart on sept 9

Elsewhere in the commodities space, oil-and-gas name Baker Hughes A GE Co (NYSE:BHGE) is also flashing a reliable bear signal. The stock's recent rebound off its Aug. 15 year-to-date low of $20.43 has it brought it face-to-face with its 200-day moving average.

Per White, there have been six other times BHGE shares have rallied to within one standard deviation of this moving average after a significant period of time below it, looking back three years. Following these previous signals, Baker Hughes shares averaged a one-month loss of 7.3%, with five of those returns negative.

Skepticism has been mounting toward a stock that's down nearly 23% year-over-year. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), BHGE's 10-day put/call volume ratio of 19.37 registers in the 100th annual percentile, meaning puts have been bought to open over calls at an accelerated clip.

Analysts, on the other hand, have maintained a bullish view of the energy stock. While 14 of 16 rate BHGE a "buy" or better, the average 12-month price target of $29.72 is a 23% premium to equity's current perch at $24.22 -- up 2.9% today as oil prices rise. A round of bear notes could create even bigger headwinds for BHGE shares.

bhge stock daily price chart on sept 9


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