by Raul de Frutos
Alcoa stock has surged over 80% during the past nine months, hitting an almost two-year high this week. It looks as if investors have high expectations on the future revenue of Alcoa as it is producing much of the aluminum for Ford Motor Co. (NYSE:F) in its new fleet of aluminum-bodied cars, including the 2015 F-150 truck.
Historically, Alcoa stock and aluminum prices have been highly correlated. As aluminum fundamentals improve, the price of aluminum surges and that means more revenues for Alcoa, causing an increase in its stock price.
Alcoa (in blue) versus Aluminum ETF (in orange) since 2009
However, this time is different. As we can see in the chart above, the stock keeps skyrocketing while aluminum, itself, remains at low levels. This is a very uncommon divergence and, interestingly, it is not a case particular to Alcoa. Other aluminum-related stocks are as strong as Alcoa's.
In the chart above, we see how the D0w Jones U.S. aluminum index (tracking major aluminum producers) has surged 70% in the last 9 months. It seems clear that there is a bright future for aluminum demand in the auto industry and it is luring investors to pour money into aluminum-related companies.
Meanwhile, the 3-month LME aluminum price closed Monday near $1,900 per metric ton, hitting a nine-month high. Aluminum still remains at low levels, but the latest moves could be signaling the end of aluminum's bearish market, as we saw in nickel a few months back. We recommend buyers watch aluminum closely in the next few weeks as good hedging / buying opportunities might show up. We suggest aluminum buyers wait for further price strength and go long if prices near $2,000/ton.
Disclosure: No positions