Alcoa is amongst many

Mean Reversion is a big theme of mine and it is a warning to heed in a market (and world) which thinks prices only travel in a one-way direction.

Whilst valuation and fundamentals matter and the pricing of an asset already takes that into account, the price action of the asset is something else to observe when ‘animal spirits’ sends it to the edges of its normal trading range or price distribution.

So, in Alcoa’s case, it is difficult to convince one self to buy the shares at this level.

And if you do, at least recognise that you may be the marginal buyer.

In the chart below, you’ll see Alcoa is stretched above a significant long term measure that I use, being the 200 Week Moving Average.

This is one study I use to illustrate moments of ‘extremes’.

Alcoa has never traded at 220% above its 200 week moving average.

In fact, a price which is 60% above (or below) its 200 week moving average is about the extent of the equity price ‘elastic’.

So, what’s next;

Although the current 200 week moving average is currently at $31, its not so clear to expect the price of Alcoa shares to simply fall and mean revert to that level.

The recent parabolic price move means that this mean will “roll higher” at a reasonably faster pace than normal.

We should see the price of Alcoa and its 200WMA converge to somewhere near the $55 mark.

This also suggests holders of Alcoa stock manage their risk (i.e. selling, hedging) 

From a corporate perspective, it’s prudent for Alcoa to use its ‘inflated’ currency (being its shares) to either raise capital, restructure debt or to make acquisitions.

April 20, 2022

by Rob Zdravevski

rob@karriasset.com.au