Alcoa Corporation (NYSE:AA) is down 52% in the past year but it wasn’t all Alcoa-specific problems. The S&P 500 is also down. More specifically, the SPDR S&P Metals and Mining ETF (NYSEARCA:XME) fell 30% for the same period.
The chart is hideous and usually is a no-touch for me. I do still see a trading opportunity, but one that I don’t want to turn into an investment.
After the 2016 election, stocks rallied sharply off the exuberance from President Donald Trump’s growth targets. Fiscal policy was slated to replace monetary incentives that the central banks had been providing since the 2008 debacle. Aluminum prices spiked and AA stock rallied 130%. But the party didn’t last long — the stock peaked last April.
Now the Trump trade is but a distant memory. Investors are expecting a recession as the yield curve is almost inverted. This is in spite of having the strongest employment market in history. Things should be booming, but headlines are holding stocks back. Add to this that the Democrats have taken back some political control, meaning that the Trump administration will have fewer opportunities to implement his fiscal plans, so the benefits are not likely to materialize.
A lot has happened in the world that directly affected materials stocks and caught experts by surprise. The U.S. instituted tariffs last March, which should have benefited U.S. aluminum company stocks, but instead there were nothing by negative consequences. The whole tariff war effects didn’t allow for the advantages that was theoretically to happen.
The trade war soured the global equity market mood. Business, especially in China throttled back on expansion plans and are still awaiting for more axes to fall. Caution now reigns and growth stalls.
Investors on Wall Street also discount all stocks that are directly tied to China. Stocks for materials and industrial companies like AA, Caterpillar (NYSE:CAT) and Boeing (NYSE:BA) feel like they fall sharply on every negative headline on Twitter (NYSE:TWTR) even.
Their fundamentals are hostage to headlines, so for the short term they are trading vehicles even though they could be good long term bets. AA is not cheap from the price-to-earnings perspective. So it is hard to argue owning it for a long term value trade.
However, what makes metals stocks bad can also be an opportunity here. There is an upside trade off the potential resolution of the China trade standoff. This is a blended technical Alcoa stock trade with a geopolitical headline.
The U.S. and China should come to some terms or kick the can down the road by March 1. In either case, the worst headline damage has already been done on Wall Street. The edge of the headline knife should dull down this year.
AA Stock Trade
The Trade Opportunity: AA stock has fallen into a sharp wedge. Those usually resolve themselves upward in a big way once they hit support. And therein lies the trading bet. AA will need the help of the general markets, but if the bulls can shrug the Apple (NASDAQ:AAPL) news this week off then there is immediate upside room in AA. Any new high on the short-term charts will serve as a mini breakout outburst.
Meanwhile, the negotiation progress headlines would remain a big part of the upside opportunity. But there are also sector-specific factors in play. The Chinese producers are losing money and, just like OPEC did with oil, these will probably cut production to crimp supply and prop up the price.
Two days ago, Asian stock markets fell on seriously bad Chinese economic data. Today added to the fears by confirming a slowdown in sales. So in the past, this usually prompted the Chinese government to inject money into their economy. They has been the growth engine for the world and Alcoa should benefit from it if it happens.
However, if the U.S. and China can’t come to terms then the problems could linger through all of 2019. So if the U.S. and China completely botch the tariff deal, I have to remain vigilant with my stop loss on this trade. I do not want to turn it into an investment. Below $25, AA stock could accelerate lower. There is room to fall $22 per share before it hits weekly support. That would be the pre-Trump-election levels.
Click here and enjoy a free video and more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.