Russian sanctions fire up aluminum shares
Don’t call Alcoa (AA) a stolid blue-chip industrial stock. The aluminum producer has put up some pretty tech-like numbers in recent weeks, racking up a 25% gain so far in April and knocking at the door of its January high of $57.50, with Q1 earnings scheduled for release after tomorrow’s close.
Alcoa (AA) 12/27/18–4/16/18. Alcoa (AA) price chart. Breakout on sanctions

Source: OptionsHouse

The reason for the move is no secret: Alcoa has been the beneficiary of geopolitical tailwinds a couple of times in recent months—one being more like a momentary breeze and the other a potentially longer-term trade wind.

The first was the Trump administration’s announcement of tariffs on steel and aluminum in early March, which may have contributed to the short-term bump that took AA shares close to their February 16 high (coincidentally, the date the Commerce Department initially “recommended” the duties). Overall, though, the early March rally simply formalized the upper boundary of what turned out to be a two-month trading range that was penetrated when the second catalyst came into play—namely, US sanctions on Russian oligarchs with ties to the Kremlin (i.e., Vladimir Putin).

One of the hardest hit was Oleg Deripaska and his company United Co. Rusal, which until 2015 was the world’s largest aluminum producer and today is still no. 2 by most metrics. The sanctions, which among other things prohibit Americans from doing business with the company, have resulted in Rusal being removed from stock market indexes and the London Metal Exchange refusing to accept Rusal aluminum, while both Moody's and Fitch Ratings have withdrawn their credit ratings for the firm.1

As the largest aluminum producer in the US, Alcoa is poised to benefit from this scenario, as Goldman Sachs recently pointed out.2 The slightly longer-term chart below shows that over the past 18 months AA’s story has been one of meandering ranges and consolidations punctuated by occasional upside bursts (the July-October 2017 rally notwithstanding). From a trading perspective, Alcoa is about to test whether this catalyst really has legs. Its huge April rally has taken it to a resistance level just around the time it’s set to release earnings—an event that, historically, has resulted in a small average price decline for AA shares over the following week.3

Alcoa (AA) 11/1/16. Alcoa (AA) daily price chart. Russian sanctions.

Source: OptionsHouse

Aside from the natural technical pullback that may be expected when a stock is approaching a technical level after an explosive move, any political resolution to the US-Russia standoff could pull the rug out from under the stock—much in the same way easing tariff worries coincided with a sharp pullback in US steel (X) shares last month. Until then, though, AA could rebound from any interim setbacks and make a play at a new 52-week high.


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1 US sanctions are killing this oligarch's business. 4/13/18

2 Barron’s. Russian Sanctions Could Bolster Alcoa. 4/11/18.

3 StreetInsider. Alcoa (AA) Earnings. 4/16/18.