Alcoa (NYSE: AA) had the ominous and unenviable task of being the first of the Dow Industrials to step up to the plate. And like a tubby first baseman who’s spent the winter off-season shoveling down junk food, Alcoa swung and missed. Badly.

Already waddling around with debts of more than $10.5 billion, America’s largest aluminum producer reported further loss of half a billion dollars for the quarter (59 cents per share), as sales plunged by 41%. As a sign of how hard the recession has bitten the company, it compared to net income of $303 million (37 cents per share) in Q1 2008. It was the company’s first consecutive quarterly losses since March 1994.

The news wasn’t a surprise. As the recession squashes aluminum demand, prices have plummeted around 50% over the past year. At current levels, 70% of the aluminum industry is unprofitable, according to Svein Richard Brandtzaeg, CEO of Europe’s second-largest aluminum producer, Norsk Hydro.

And with Alcoa projecting a further 7% drop this year, it’s already laid off 13,500 workers and slashed production by 20% since mid 2008. Just last week, it announced that it will shut down half its out output (120,000 tons worth) at a factory in New York.

So is Alcoa’s news a sign of things to come this earnings season?

The Current Earnings Season In Context

Let’s set this earnings season in context…

It comes amid a sudden, surprising shift in investor sentiment. Out with the fear and panic that gripped the stock market during its winter of discontent. In with a frenetic four-week bout of buying to relieve oversold conditions. Here’s why…

• The Federal Reserve pumped $1.1 trillion into the credit markets.
• The G20 nations agreed a $1 trillion deal last week and a tripling of lending by the International Monetary Fund to emerging nations.
• The Financial Accounting Standards Board changed mark-to-market accounting rules, which should limit bank losses and boost lending.

Or perhaps Wall Street just has a case of Seasonal Affective Disorder as spring got underway.

Either way, when stocks are oversold, it doesn’t take much good news to trigger a rally. But here’s why you should keep that champagne on ice…

• The rally that has catapulted stocks 25% higher is dangerous, as it comes amid a bear market – often known for producing sharp, surprising rallies that can fool investors. Remember, this rally lifted stocks from 12-year lows and estimates suggest the economy shrank by 4.5% during the last quarter.

And against that backdrop, we’ve got a short-term downward catalyst in the mix…

Earnings season.

Watch For The Earnings Season Domino Effect

As we’ve seen so often over the past few months, investors have very little tolerance for bad news.

So brace yourself for an earnings season that will see S&P 500 companies’ profits slide 37%, according to Thomson Reuters. That would mark the seventh straight quarterly decline.

And if you’re looking to play sector trends, keep in mind that Alcoa’s dismal report could trigger a domino effect of poor earnings in industries that use heavy amounts of aluminum. For example, construction, manufacturing, and transportation industries like autos and aviation.

2 Tips To Combat Earnings Season

Here are a couple of other earnings season tips…

Earnings season is a notoriously difficult time to trade. Volatile price swings higher or lower are much more prevalent as companies release their quarterly reports and the market reacts to the news en masse.

And with the economy in recession, there’s a higher chance of bad macroeconomic data (poor unemployment news, for example) adding to the danger. Whether they occur post-market or pre-market, because these price swings are tough to predict, it’s essential that you’re prepared in advance, as it’s too late once the action is in progress.

Here are a couple of steps you can take to mitigate the risk…

• Position Size: Ensure that your portfolio is position-sized prudently. Don’t invest too much in one or two positions. Ideally, you should invest a similar dollar amount in each position and put no more than 1% or 2% into each position.
• Use Stop-Losses: You should be doing this anyway, but it’s particularly important during earnings season, as they protect you from a shock.

No matter which way your stocks move after earnings are released, the move will either be for valid, specific reasons, or a market overreaction (imagine that!) Make sure you know and understand them.

For example, a huge corporate loss, drug failure, or SEC investigation will hammer a stock. But even when the news is good – such as a big profit, takeover announcement, or strong future guidance – a stock can decline as investors take profits.

Earnings reports are usually short-term catalyst events. But it’s a time when the “herd mentality” can rule – especially when investors are more nervous than usual. Stocks can get rewarded or punished unfairly, so be prepared for price swings and react accordingly, whether that’s cutting your losses or locking in gains.

Martin Denholm

Source: Earnings Season: How to Prepare for Price Swings & React Accordingly

So much for history.

It makes more sense to focus on the present – and that means taking what the market gives us. With commodities, that’s a hearty dose of volatility…

Another Chance To Go Long On Natural Gas

The natural gas market giveth and then taketh away.

We’ve been bullish on the natural gas market since the price hit a long-term support level near the $4.500 per MMbtu mark a few months back. Since making a new low price of $3.740 (based on the May 2009 futures contract) on March 18, the futures blasted higher by 1,000 ticks and reached a high of $4.750.

But with a surprise Energy Information Administration report last Thursday, which showed a much larger buildup of underground natural gas supplies, the market has sunk right back to its lows of $3.750 per MMBtu.

Although we’re a little disappointed with the current state of this market, we continue to like natural gas for the very long-term – particularly as hurricane season creeps closer and the risk of damage to natural gas operations in the Gulf heightens.

If you’re thinking of initiating bullish trades, you can do it through the natural gas futures options market on the NYMEX, or on the market’s main ETF – the United States Natural Gas Fund (NYSE: UNG).

A Wide Range For Crude Ahead

Crude oil continues to swing in large ranges.

The May futures contract just hit a near-term high of $54.66 per barrel – a significant jump from its low of just under $40 last month. But with a bout of profit-taking in the mix, the contract’s 20-day moving average has moved to support near $49 per barrel.

Depending on the mood of the market, we could see oil hold at this level and head higher again. If it doesn’t hold, though, we could see a drop back down to $40 very quickly.

Regardless, our near-term trading range for oil continues to fall between $30 and $60 a barrel.

Metals Pause For Breath… But Get Ready For The Next Move Higher

With gold and silver having recently tagged highs ($1,000 per ounce for gold and $14.50 per ounce for silver), both have taken a bit of a breather and retraced some of their gains.

This kind of profit-taking is perfectly normal – and is actually a good thing, as it gives the markets a chance to consolidate in preparation for the next leg higher. We still believe this will happen.

For gold: We don’t see the front-month futures contract (June) trading much below $870 per ounce after the current pullback is over.

For silver: We shouldn’t see a price much below $12 an ounce for the May contract.

With the stock markets still unsteady, many investors are sticking with metals as part of a diversified portfolio.

Aside from using limited-risk option strategies to play gold and silver futures options on the COMEX market, you can buy outright shares of the ETFs that track the price performance of gold and silver – the SPDR Gold Trust (NYSE: GLD) and iShares Silver Trust (NYSE: SLV) respectively. You can also play options on these ETFs.

Could Winds Whip OJ Into A Bullish Frenzy?

Keep an eye on the orange juice market. It’s definitely bounced off its yearly lows near $.65 per pound and has trended higher to its current price of $.77 per pound.

Orange juice is a market that heats up towards the late spring/early summer – and is then on full “hurricane watch” from June until November. We’ll continue to post the monthly chart of orange juice as a reference point of where it’s been before – and could potentially go again.

That’s all for this edition. Catch you next time.

Source: Natural Gas: Another Chance to Profit As This Commodity Takes a Tumble

Platinum also traded narrowly, within a $15 range and with a bias to the upside, ending at $1975/oz., up $18. Overnight, platinum is off sharply.

Silver spiked in New York morning trading, peaking at $17.14, but was unable to hold above the $17 level, sliding back to close at $16.99, up 15 cents. Overnight, silver has been trending lower.
(Click here for charts)

Lack of volatility was the order of the day on Monday in the precious metals markets, which probably came as a relief to traders jolted by recent sharp price swings. And most analysts expect trading to remain thin ahead of the Fed’s interest rate decision, due out on Wednesday.

Gold yesterday received support from the energy sector, which saw oil prices rising, but not much from the dollar, which was little changed.

Silver took its cue in part from copper, which was firm on supply worries.

If “Gold is holding up on oil and because of the threat of inflation,” according to Miguel Perez-Santalla, of Heraeus Precious Metals Management in New York, then what’s the likely outcome this week?

The Fed’s decision could have significant ramifications for gold. A rate cut of another 25 basis points, once thought all but certain, has picked up a bit of doubt in the face of increasing inflation.

Should the Fed go ahead with that quarter-point cut, that of course is negative the dollar and positive gold and, if the cut isn’t already factored into the current price, then “look for the bull trend to reassert itself,” says Ralph Preston, of HeritageWestFutures.com in San Diego, California.

However, “We expect the dollar’s rally to pick up steam if the Federal Reserve decides to stand pat on interest rates,” said Edward Meir of MF Global. “This could set off another potentially heavy round of profit-taking in commodities.”

So the easy call is that, “Gold will trade cautiously in the next couple of sessions” ahead of the Fed, said analysts at Action Economics.