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Caterpillar equipment (Scott Olson/2006 Getty Images)
Caterpillar equipment (Scott Olson/2006 Getty Images)

Stock Trends

Caterpillar: An optimist's bet on a resurgent market Add to ...

The Stock: Caterpillar Inc.

Recent price: $95.65 (U.S.)

The trend

The market is rotating toward defensive sectors, but some investors are not ready to abandon the global growth story. Emerging market equities have retreated this spring, sharing in the correction that has befallen the materials sector. Talk of commodity and Chinese bubbles bursting has capital on the move in anticipation of further broad market declines.

More related to this story

But what if you don’t buy into this gloomy scenario? What if the economic tea leaves begin to show more positive signals? A technical survey of retreating big-capitalization stocks with a high correlation to the global economy’s business cycle offers some hope that market losses could yet be stemmed, and that a rebound off primary trend lines is in the offing. The current market correction has provided some enticing valuations – especially for multinational stocks that have taken a haircut with the spring market setback.

Global industrial stocks are of particular interest. Big name global industrials such as 3M Co. Siemens AG, United Technologies Corp., and Honeywell International are still trading above their 40-week moving averages. Although others, such as conglomerate General Electric Deere & Co., as well as global shippers Fedex and UPS are not, and appear vulnerable to further declines, bullish-minded investors can look for trend support and relative stock price performance in this heavily capitalized industry and add to their equity exposure on the current weakness.

The trade

Highly correlated with the commodity bull market that erupted in 2009 is the stock of Caterpillar, the poster boy of industrial strength and global growth. A leading component of the Dow Jones industrial average during 2010, Caterpillar is now 16 per cent off its 2011 high but is still trading above its 40-week moving average trend line. Indeed, the share price is approaching a critical juncture where a drop toward the 40-week moving average price near $95 would be a tipping point on this industrial powerhouse. Will it be a rallying signal, or tripwire for further selling? Now is the time to make your call.

The upside

Value investors will be keen on Caterpillar. Its dividend is still increasing, and its market multiples are attractive – now at 11 times forward earnings. A resurgence of the stock market could ignite this stock and return the share price well above its high.

The downside

In reality, the stock market is showing ample signs of weakness. Its trend foundation – reflected in the number of positive trending stocks – has a big crack in it. Further retreats by Caterpillar’s stock below its trend marker around $95 will invite more losses.



Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca





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