Why the Reaction to Alcoa Inc. (AA) Earnings Is So Important

Fourth-quarter earnings season unofficially kicks off when Alcoa Inc (AA) announces its results next Monday evening

Jan 9, 2015 at 7:36 AM
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Fourth-quarter earnings season unofficially gets underway after next Monday's close, when aluminum issue Alcoa Inc (NYSE:AA) takes its turn in the confessional. Technically speaking, the stock is heading into the event sporting an impressive 49% year-over-year advance, due in part to a handful of bounces off its rising 200-day moving average, as well as a couple of solid one-day post-earnings gains. Specifically, after unveiling its first-quarter results last April, AA went on to add 3.8% in the subsequent session, and tacked on 5.7% that following July.

Daily Chart of AA Since January 2014 With 200-Day Moving Average

Meanwhile, on the sentiment front, skepticism in the options pits has been building in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), AA's 10-day put/call volume ratio has grown to 0.96 from 0.54 over the past two weeks, and now ranks in the 78th percentile of its annual range. In other words, puts have been bought to open over calls at a faster-than-usual clip of late.

Echoing this is AA's Schaeffer's put/call open interest ratio (SOIR) of 0.86, which ranks higher than 72% of similar readings taken in the past year. Simply stated, short-term speculators are more put-heavy than usual toward the stock.

Drilling down on the front-month series, a lofty accumulation of put open interest can be found at the January 2015 15 strike, where 24,570 contracts currently reside. Since Oct. 10, traders at the ISE, CBOE, and PHLX have bought to open more than 21,500 contracts here, meaning they expect AA to settle south of $15 at next Friday's close, when front-month options expire. Of note, AA last reported earnings the evening of Oct. 8, and in the subsequent session, the stock shed 4.2%.

From a wider perspective, the way the market reacts to AA's quarterly earnings reports is often rumored to set the tone for how the S&P 500 Index (SPX) performs over the ensuing months. Schaeffer's Senior Quantitative Analyst Rocky White ran the numbers over the last 10 years, and in the 16 instances when there was a positive reaction to Alcoa's earnings, the SPX averaged a 10-day return of 1.2%, and was positive 88% of the time. Going out three months, the SPX tacked on an average of 3.5%, and was positive 69% of the time.

However, in the 23 instances when there has been a negative reaction to Alcoa Inc's (NYSE:AA) earnings over the past 10 years, the SPX has averaged a lackluster 10-day gain of 0.33%, and is positive less than two-thirds of the time. The results are similar when the time frame is expanded to three months, with the SPX up just 57% of the time, averaging a 0.4% advance.

SPX Performance Based on AA Earnings Reaction

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