Is The Risk-Trade Back On? (CAT, AA, FCX)

The Dow Jones Industrial Average (DJI) just completed its best week in nearly a year, surging 511 points, or 5.33%. Optimism about second quarter profits and a less pessimistic view of global growth helped drive stocks higher despite an absence of fresh economic data. So, with stocks surging, is the risk-trade back on? The risk-trade is where investors prefer cyclical stocks closely tied to economic growth such as the materials, commodities and consumer discretionary sectors. As economic growth rises, these stocks tend to rise rapidly. For the week Alcoa AA gained 9.4% while Caterpillar CAT gained 9.3%. These stocks are the quintessential risk-trade stocks because they are closely tied to the global growth cycle. Materials company (and China play) Freeport-McMoRan FCX gained 12.71% last week. Alcoa is set to kick off earnings on Monday after the close. It's not so much what their results are, but what the company's outlook is like. If Alcoa gives a positive outlook, the risk-trade will definitely be back in full force. Investors should wait until Monday to determine whether last week's rally was a head fake or the return of the bull market.