Tough moment. Really overbought. The most of the whole year. We have seen outsized gains in so many stocks in the materials segment, even as we found out tonight that China's doing even worse than we thought.
That was the real takeaway from the Alcoa (AA) quarter, from what I can see. CEO Klaus Kleinfeld made huge slashes in production for the country, so big that you can see why so many are saying that this time it must be different and the Chinese have to do something serious to get the economy going.
I felt the exact same way when I read founder Jack Ma's letter about the poor performance of Alibaba (BABA), where he left the door open for what could be 5% GDP growth.
So the question is, what will people do in the chasm of reality? Will they hold on no matter how bad China is because these stocks could be coiled springs? Or do they say Alcoa dropped on a horrendous number so they will all drop.
I think the value move has legs and people will see through the valley. I don't think the move is over. Alcoa will, of course, go down, but I don't think it will give up most of the gains it has made since the split was announced.
But here is something worth pondering: If you owned just the commodity side of Alcoa, the part that's a low-cost producer of bauxite, that is, coming down the cost curve for the raw product, would you buy it expecting that China's at a trough? Because if you think that, remember the split's going to take -- earliest at least -- seven months to enact. That might mean it is worth it to start buying it under $10, recognizing that when Precision Castparts (PCP) no longer trades, people will be reaching for an analog and they will grab Alcoa and just accept that they have a division that might not be so hot, but might not get any worse than it is.
In other words, even as Alcoa looks like it is headed down the rabbit hole, I think there will be a momentary reset about how much one might like Caterpillar (CAT) or Freeport (FCX), but that, in the end, the value buyers are in charge in this market and they aren't going to pass on this opportunity.