The strong performance of the industrial sector in this Tuesday’s market rally indicates the premium position Caterpillar would have with a return of a more bullish market sentiment.
The Stock: Caterpillar Inc. (CAT) Recent price: $97.86
Trend: The market is rotating toward defensive sectors, but some investors are not ready to abandon the global growth storyline. Emerging market equities have retreated this spring, sharing in the correction than has befallen the materials sector. Talk of commodity and Chinese bubbles bursting has capital on the move in anticipation of further broad market declines that emanate from a slowdown in growth among developing economies.
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 like 3M Company (MMM), Siemens AG (SI), United Technologies Corp. (UTX), and Honeywell International (HON) are still trading above their 40-week moving averages. Although others such as conglomerate General Electric (GE), Deere & Co. (DE), as well as global shippers Fedex (FDX) and UPS (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 Industrial index 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 point where a drop below $96 toward the 40-week moving average price near $95 would give the market’s verdict on this industrial powerhouse. Will it be a rallying point, or trip wire 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 strong performance of the industrial sector in this Tuesday’s market rally indicates the premium position Caterpillar would have with a return of a more bullish market sentiment.
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.
Published in Stock Trends
Stock Trends analysis quantifies nicely the movement of individual stocks. I’ve found that if the technicals are out of synch with fundamental analysis, it is a wake-up call to make a decision. The Stock Trends Bull/Bear Ratio is useful in identifying major market bottoms and tops. It has always presented a good buying or selling opportunity.
