Why You Should Care About Alcoa’s Earnings by Hannah Chody

My name is Hannah Chody and I am a summer intern at the CBOE and a rising senior at the University of Southern California’s Marshall School of Business, majoring in Finance. My attraction to fast-paced environments and quantitative skills led to an early interest in financial markets and exchanges. After hearing about the CBOE’s summer internship program, I knew it would be a great fit. The amount that I have learned in this position thus far is outstanding and the real world experience exceeds previous class time spent learning about options trading and volatility. This will undoubtedly help, not only as I continue my studies of financial derivatives this upcoming school year, but also post-graduation, where I plan to carry my skills learned this summer to a career in the finance industry.

Earnings season is upon us with Alcoa leading the pack. Alcoa, which was a member of the Dow Jones Industrial Average up until a couple of years ago, reports its second quarter earnings today after the close.   As Russell mentioned in his Gray Swan blog last week, Alcoa’s earnings release is considered to be the beginning of earnings season. There have been various studies on Alcoa’s post earnings stock performance as a leading indicator for the overall stock market, so we did some further research. We took 43 quarters of history of Alcoa’s stock activity and checked how the rest of the stock market performed after Alcoa’s earnings were released to see how strong the relationship is.

AA Figure 1

Of the 43 quarters, Alcoa stock was higher 17 times after earnings were released and lower 25 times. There was one quarter where the stock was unchanged on the day off earnings which does not tell us much at all.

AA Figure 2

We then looked at what the stock market did 5 days, 10 days, 15 days, and 20 days after the day that Alcoa stock reacted positively to earnings and traded higher. This is where most of the correlation was found. Of the 17 times Alcoa stock was higher off earnings, the S&P 500 was higher the majority of the time in the days following Alcoa’s earnings report. Basically, when Alcoa trades up on earnings, it is bullish for the stock market over the course of earnings season.

AA Figure 3

Then, we did the same analysis to see what the stock market did 5 days, 10 days, 15 days, and 20 days after the day that Alcoa stock reacted negatively to earnings and traded lower. The relationship here wasn’t nearly as prominent – the S&P 500 only moved lower around half the time, at most, when Alcoa stock was lower after earnings were released. Overall, when Alcoa trades down on earnings, it doesn’t tell us much about how the stock market will react.

AA Figure 4

Finally, we looked at what the stock market did 5 days, 10 days, 15 days, and 20 days after the day Alcoa stock reacted to earnings. The S&P 500 was up over sixty percent of earnings seasons going back over ten years. That itself is an interesting observation.

Overall, if Alcoa’s stock price is higher off earnings, there is a good chance that the S&P 500 will trade up over the course of earnings season and there is a bullish forecast for the stock market. However, regardless of what Alcoa’s earnings tell us and its stock’s reaction to earnings, there is over a 60 percent chance that the stock market will trade higher over earnings season. Unfortunately, if Alcoa’s stock price is lower after earnings, it doesn’t tell us anything about the forecast for the stock market over the rest of earnings season.

So today after the close Alcoa reports earnings and on Wednesday we can see what the stock’s reaction is like. If AA trades up that’s a positive sign for the stock market. If it trades lower then it isn’t necessarily a negative.