AA as a Market Predictor

After the market close on Monday January 11, Alcoa (AA) will report their 4th quarter of 2009 earning results. Most likely today on CNBC at some point the phrase, “Alcoa’s earnings signal the official start to earnings season.” As traditionally the first stock in the Dow Jones Industrial Average (DJIA) to report earnings, Alcoa is considered by many to be an early indicator of the impact earnings season may have on the stock market. Being a skeptic, I always want to question what “people” consider to be fact, especially regarding the market. What I found made me a bit less skeptical.

It turns out using AA’s reaction to earnings gives one a good idea what direction the DJIA is going to go over the next few days. Since the year 2000 there have been 40 earnings reports from AA, 29 of these 40 times (72.5%) the direction of AA stock on the first full trading session following their announcement has indicated the direction of the DJIA for the next five trading days. Stated differently, if AA trades up on their earnings, the DJIA has a good chance of being higher five closes later. Conversely, if AA trades lower on their earnings report, the DJIA has a good chance of be lower five closes later. Of course as always past performance is no guarantee of future results.

Here is how this worked for AA’s last earnings report –

Wednesday October 7 – AA reported earnings after market close

Thursday October 8 – AA stock up .15 on the day DJIA closes at 9786.87

Thursday October 15 – DJIA closes at 10,062.94 up 276.07 in 5 trading days

So Monday after the close AA will report and then the stock will be up or down on Tuesday. Five days later, we’ll see if AA’s stock will improve on it’s predictive ability for the overall market during earnings season.