It seems the moment of truth is upon us. On Wednesday Alcoa kicks-off what’s expected to be a critical earnings season for stocks.
And their results could impact the markets – times two. First investors want to know what their results mean for the materials sector. And second they’re eager to find out what it means for the broad stock market.
Materials
David Lipschitz of CLSA tells Fast Money that he expects earnings will likely be weak. And he's hardly alone. On average analysts expect Alcoa to post a loss of 38 cents per share in the quarter ended June 30 – the company's third consecutive quarterly loss.
How should you play it?
In an a note to investors earlier this week, Merriman Curhan Ford analyst Dana Guido said that if Alcoa's results are weaker than expected or if the aluminum maker provides disappointing guidance "without materially lowering its end market outlook" investors should become buyers of steel companies on the pullback.
Steel, unlike aluminum, is benefiting from lower inventory, she said. "In our opinion, any increase in metals demand would tighten the steel market significantly faster than the aluminum market."
Broad Market
Cummins Catherwood, managing director of Boenning and Scattergood watches Alcoa as an indicator of economic activity.
"Are people making more autos or planes or toasters? When you see volumes increase, you see Alcoa respond. I always watch their earnings as a reasonable indicator of what you're about to see," he explains.
In other words, in addition to profits Catherwood will look to see what Alcoa says about orders – and use that information to determine if we're looking at a deeper recession or an easing of the global downturn. It’s fairly safe to conclude that if Alcoa surprises to the upside Catherwood anticipates the market will move higher.
However, not everyone on Wall Street considers the aluminum producer to be a economic bellwether.
"FedEx and UPS are better signs of a change in direction," counters Joseph Battipaglia, a market strategist at Stifel Nicolaus. "I would not take what Alcoa says as a significant indication of how the American or global economy is faring."
Read More:
>What Does Alcoa Mean For Economy?
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Trader disclosure: On July 7th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Terranova Owns (MSFT), (XBI), (ABT); Terranova Owns (UNG) Puts; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman Owns (TBT), (RIG); Finerman's Firm Owns (FCN), (MSFT), (NOK), (PBR), (RIG), (TBT), (WMT), (FLS); Finerman's Firm Owns (BAC) Preferred; Finerman Owns (BAC) Preferred; Finerman's Firm Is Short (BAC), (IYR), (IJR), (MDY), (SPY), (USO); Seymour Owns (AA), (AAPL), (BAC), (BX), (DRY), (EEM), (FXI), (INFY), (SBUX); Seymour's Firm Is Short (PBR); Seymour's Firm Owns (FCX), (NOK)