Following Up on Alcoa’s Bullish Market Signal by Hannah Chody

Twenty trading days have passed since Alcoa reported its earnings on July 8th. To see if what I concluded last month held true, we took a look at the performance of Alcoa’s stock after their earnings release and what the S&P 500 did over the last 20 days. The link below discusses how a positive price reaction from Alcoa’s stock may be a bullish signal for the overall equity market –

http://www.cboeoptionshub.com/2014/07/08/care-alcoas-earnings-hannah-chody/

After earnings, Alcoa closed at 15.69 on July 9th – up from 14.85. The S&P 500 closed at 1972.83 that same day – up from 1963.71 on July 8th. Based on history his positive move in Alcoa’s stock after its earnings announcement was a bullish signal for the S&P 500 over the course of earnings season.

Five days after Alcoa’s stock traded up on earnings, the S&P 500 was up to 1981.57. This follows the trend identified in the last blog, which showed the S&P 500 level was higher 70.59 percent of the time five days following an increase in AA’s stock price after earnings.

Ten days later, the S&P 500 was still increasing, up to 1987.01 after the market close on July 23rd. This still followed the trend that a positive reaction to Alcoa’s earnings resulted in a bullish forecast for the stock market.

Due to a slight sell off in the market, the S&P 500 was down to 1970.07 fifteen days after earnings. However, this is only 2.76 points lower than the S&P 500 level the day Alcoa’s stock reacted to its earnings. This decrease does not match the research showing that in this situation, the stock market should be up 88.24 percent of the time.

Twenty days later, the S&P 500 was doing terribly in relation to its typical reaction when AA trades up on earnings. The S&P 500 closed at 1920.20 on August 6th, making my prediction based on historical performance completely incorrect. The numbers that suggested the S&P 500 should be up 82.35 percent of the time twenty days after a positive reaction to AA earnings and, on average, up 65.12 percent of the time throughout earnings season regardless of how Alcoa’s stock reacts after earnings did not support the behavior of the stock market this earnings season.

Overall, the stock market reacted as we expected for at least ten days after Alcoa’s stock price increased after its earnings announcement. However, as time went on and the market sold off more and more, the S&P 500 levels fifteen and twenty days later do not match our data.