Earnings will hit Wall Street starting this week and Dow component Alcoa (AA, $32.78, up $0.67) will officially start things off Tuesday after the market closes. The stock has taken a hit over the past month, dropping roughly 20%, from $40 to its current levels. No surprise there as the current bear market (it’s official) has taken a lot of stocks lower. A bear market occurs when the market has sold-off 20% from a high. Last October the Dow hit a high of 14,279. It closed at 11,288 Thursday.

Alcoa hasn’t participated in the commodity rally although the price of aluminum has gone up. The problem for Alcoa is that energy accounts for a huge percentage of the cost of making aluminum.

Wall Street is expecting earnings of $0.69 a share, down from $0.73 a share versus last quarter. However, analysts have been lowering those estimates as its likely the company will miss earnings due to a slowing economy and rising raw material prices, so they say. Maybe the recent drop has already been factored into the stock price but it could be tough for Alcoa to make a sharp rebound in these current market conditions.

Alcoa should do well over the next 6-12 months even if Wall Street doesn’t like the numbers. The company predicted strong growth in global demand for this year of nearly 9%, well above the average 6% growth rate for the previous 10-year period. Of course, China will lead the way but the demand for aluminum has actually been declining in the U.S. and Europe.

As far as an option trade it’s hard to tell if the glass is half full or half empty with Alcoa. Trading options around an earnings announcment is always risky but this one takes on a higher degree of risk because of the circumstances. In situations like these its best to stand on the sidelines and wait for better trades instead of forcing the issue.

Rick Rouse
Rick@OptionsMentoring.com