What Alcoa's Stock Is Telling Investors About Broader Market

While some investors consider Alcoa’s earningsa bellwether for corporate profits, what the stock does after the aluminum giant reports quarterly results may be a better indicator for the market.

A worker walks among rolls of semi-finished aluminum at the Alcoa aluminum factory in Szekesefehervar, Hungary.
Getty Images
A worker walks among rolls of semi-finished aluminum at the Alcoa aluminum factory in Szekesefehervar, Hungary.

And right now, the stock’s decline of more than 4 percent—despite Monday's slightly better-than-expected results—could be signaling bad news for the market.

"History would say we should definitely be worried over the coming weeks," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.

Over the past 26 quarters, Alcoa's stock closed higher 10 times and lower 16 times the day after the company reported earnings.

When the stock closed higher, the S&P 500 rose the next month some 70 percent of the time, with an average gain of 2.2 percent.

When Alcoa closed lower, the S&P was down more than 50 percent of the time, with an average loss of 0.7 percent.

S&P 500 Performance After AA Earnings

No. of Returns
Average Return
Median Return
Percent Positive
Positive AA Reaction 10 2.2% 2.7% 70%
Negative AA Reaction 16 -0.7% -0.7% 44%
Source: Schaeffer's Investment Research

“As random as it sounds, the findings suggest there could be significance on the first day that Alcoa trades—there could actually be some type of overall correlation,” said Detrick.

The Dow component posted quarterly earnings and revenue that edged past Wall Street’s expectationsMonday afternoon, even though prices for its aluminum were almost near a two-year low.

Still, shares pulled back Tuesday, tumbling more than 4 percent, and at least three brokerages cut their price target on the firm.

So based on historical trends, today's pullback in Alcoa would indicate a potential decline in the market over the next month.

"Nonetheless, I guess bulls could hang their hat on the fact Alcoa was a bad indicator last quarter when it jumped initially on earnings, yet the SPX sold off the next month," he said, referring to the aberration to the trend in April when Alcoa gained 6 percent a day after its earnings report.

While the stock's rally should have correlated to a positive quarter for the S&P 500, the index went on to lose nearly 1 percent over the next month of trading.

Alcoa’s performance traditionally reflects broader global economic trends as aluminum is used in a wide-range of products from airplanes to construction materials. But the aluminum industry has recently suffered from weaker prices, rising inventories, and lackluster demand in the face of a sluggish global economy.

"Alcoa beat the much-lowered expectations, yet still sold off hard," said Detrick, referring to the company's most-recent results. "The big question is will this happen to other companies as we get into the heart of earnings season?"

JPMorgan and Wells Fargo are the next big companies scheduled to report earnings. Both banks will be reporting on Friday morning.

—By CNBC’s JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

Questions? Comments? Email us at marketinsider@cnbc.com