Taking One Bearish Signal and Using It to Discover a Potential Problem for an Entire Industry
With the overall market screaming higher in recent weeks and with so many stocks in overbought territory, I went looking for bearish trade ideas that could be used to hedge my long portfolio.
I started my search with a quick screen of bearish signals produced by Tickeron's platform. There were 10 stocks that appeared from the screen, one of which was Alcoa (NYSE: AA). When I pulled Alcoa up specifically and started looking at other aluminum companies, I discovered a potential problem for the group as a whole.
The aluminum theme refers to companies engaged in making aluminum components and products. Crown Holdings, Inc., for example, designs and manufactures steel and aluminum cans. Tredegar Corp. produces plastic films and aluminum extrusions. SIFCO Industries Inc. makes metalworking products. Alcoa itself produces aluminum used by other companies in their own products.
For Alcoa, there was a bearish signal from the Bollinger Bands as the upper band was broken. A price fall is expected as the ticker heads toward the middle band, which invites the trader to consider selling or shorting the ticker or exploring put options. In 25 of 35 cases where AA's price broke its higher Bollinger Band, its price dropped further during the following month. The odds of a continued downward trend are 71%.
I also pulled up the fundamental analysis ratings on Tickeron and noticed that the Profit Vs. Risk Rating was a 100—the worst possible score a stock can get. It also got a poor score of 88 on the P/E Growth Rating. This led me to look at other companies in the aluminum industry and so I pulled up the group.
Looking at the fundamental analysis screener I found there were 10 stocks in the group. Seven of the 10 scored 100 on the Profit Vs. Risk rating while the other three stocks had scores of 93, 84, and 62. In other words, every single stock in the group is below average when it comes to Profit Vs. Risk right now. The only one that gets a score that is even close to average is Crown Holdings (NYSE: CCK).
After finding this information a little concerning, I jumped over to the technical analysis screener for the group. What I found there was that Alcoa wasn't the only stock in the group that had received a bearish signal from its Bollinger Bands. Eight of the 10 stocks have received bearish signals from the Bollinger Bands indicator within the last few weeks with five of them coming within the past week.
Looking at the success percentages, six of the 10 stocks with bearish signals show a probability of success of 70% or higher. That's a really high percentage for a group of six stocks.
The aluminum industry tends to be very dependent on growth in the overall economy for its own growth. If the economy is growing, the aluminum industry tends to grow as well. If the economy is shrinking, the industry tends to see a decline in earnings and revenue. This can be explained by looking at the products where aluminum is used. A lot of aluminum is used in packaging—soft drink cans, beer cans, etc. While many of these products are considered staples, they still tend to be somewhat dependent on overall economic growth.
Momentum for the market as a whole is clearly to the upside at this time. However, there will come a time where the euphoria wears off and we will see some selling hit the market. When it does, the aluminum industry could be one that gets hit particularly hard. This is based on the incredibly high Profit Vs. Risk ratings and the confidence levels from the bearish Bollinger Band signals.
AA's RSI Oscillator recovers from overbought zone
The 10-day RSI Oscillator for AA moved out of overbought territory on April 10, 2024. This could be a sign that the stock is shifting from an upward trend to a downward trend. Traders may want to look at selling the stock or buying put options. Tickeron's A.I.dvisor looked at 28 instances where the indicator moved out of the overbought zone. In of the 28 cases the stock moved lower in the days that followed. This puts the odds of a move down at .
Technical Analysis (Indicators)
Bearish Trend Analysis
The Stochastic Oscillator may be shifting from an upward trend to a downward trend. In of 63 cases where AA's Stochastic Oscillator exited the overbought zone, the price fell further within the following month. The odds of a continued downward trend are .
The Momentum Indicator moved below the 0 level on April 23, 2024. You may want to consider selling the stock, shorting the stock, or exploring put options on AA as a result. In of 90 cases where the Momentum Indicator fell below 0, the stock fell further within the subsequent month. The odds of a continued downward trend are .
The Moving Average Convergence Divergence Histogram (MACD) for AA turned negative on April 15, 2024. This could be a sign that the stock is set to turn lower in the coming weeks. Traders may want to sell the stock or buy put options. Tickeron's A.I.dvisor looked at 43 similar instances when the indicator turned negative. In of the 43 cases the stock turned lower in the days that followed. This puts the odds of success at .
Following a 3-day decline, the stock is projected to fall further. Considering past instances where AA declined for three days, the price rose further in of 62 cases within the following month. The odds of a continued downward trend are .
AA broke above its upper Bollinger Band on April 02, 2024. This could be a sign that the stock is set to drop as the stock moves back below the upper band and toward the middle band. You may want to consider selling the stock or exploring put options.
Bullish Trend Analysis
The 50-day moving average for AA moved above the 200-day moving average on April 04, 2024. This could be a long-term bullish signal for the stock as the stock shifts to an upward trend.
Following a 3-day Advance, the price is estimated to grow further. Considering data from situations where AA advanced for three days, in of 277 cases, the price rose further within the following month. The odds of a continued upward trend are .
The Aroon Indicator entered an Uptrend today. In of 211 cases where AA Aroon's Indicator entered an Uptrend, the price rose further within the following month. The odds of a continued Uptrend are .
Fundamental Analysis (Ratings)
The Tickeron Valuation Rating of (best 1 - 100 worst) indicates that the company is seriously undervalued in the industry. This rating compares market capitalization estimated by our proprietary formula with the current market capitalization. This rating is based on the following metrics, as compared to industry averages: P/B Ratio (1.616) is normal, around the industry mean (2.259). AA has a moderately low P/E Ratio (0.000) as compared to the industry average of (23.663). Dividend Yield (0.011) settles around the average of (0.035) among similar stocks. P/S Ratio (0.612) is also within normal values, averaging (833.999).
The Tickeron Price Growth Rating for this company is (best 1 - 100 worst), indicating steady price growth. AA’s price grows at a higher rate over the last 12 months as compared to S&P 500 index constituents.
The Tickeron Profit vs. Risk Rating rating for this company is (best 1 - 100 worst), indicating that the returns do not compensate for the risks. AA’s unstable profits reported over time resulted in significant Drawdowns within these last five years. A stable profit reduces stock drawdown and volatility. The average Profit vs. Risk Rating rating for the industry is 79, placing this stock worse than average.
The Tickeron PE Growth Rating for this company is (best 1 - 100 worst), pointing to worse than average earnings growth. The PE Growth rating is based on a comparative analysis of stock PE ratio increase over the last 12 months compared against S&P 500 index constituents.
The Tickeron SMR rating for this company is (best 1 - 100 worst), indicating weak sales and an unprofitable business model. SMR (Sales, Margin, Return on Equity) rating is based on comparative analysis of weighted Sales, Income Margin and Return on Equity values compared against S&P 500 index constituents. The weighted SMR value is a proprietary formula developed by Tickeron and represents an overall profitability measure for a stock.
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Industry description
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Fundamental Analysis Ratings
The average fundamental analysis ratings, where 1 is best and 100 is worst, are as follows
General Information
a miner of bauxite and aluminum
Industry Aluminum