Caterpillar Inc. (NYSE: CAT) is an iconic US corporation and global powerhouse. They are also considered to be a bellwether for the global economy. So, if CAT reports a good quarter and the projections for the period ahead are positive, the global economy is expected to expand as well.
With over 100,000 full-time employees, CAT’s revenues are around $12 billion dollars on a quarterly basis. This comes from areas such as the construction industry, resource industries, energy, and transportation – as well as their financial products.
CAT has had a good run, however, 2015 seems to have been a challenging year for CAT. The Chinese economy is slowing down at the fastest rate ever seen, and this slowdown is just within the last decade. Growth is now at less than 7% and the manufacturing PMI (Purchasing Manufacturing Index) dipped below the 50 level. This is a sign of contraction for the manufacturing sector and is especially damaging for a country that heavily depends on manufacturing revenues. This means trouble for their global economic growth, and as the old saying goes: “If China sneezes, the rest of the world catches a cold”.
It should be mentioned though, that while China is slowing, the manufacturing sectors in the Eurozone and UK are showing signs of improvement. This is not enough to offset the Chinese slowdown, so unfortunately CAT can’t recover from losses there with Europe’s timid uptick in the manufacturing sector.
This shows us, that the conditions are still favoring a slow economic growth, even though the Fed in the United States is contemplating a rate hike at the next meeting in December.
What is interesting about CAT is not the fundamental, but the technical picture. The dip into the $65/share was quickly bought, and this opens the possibility for an inverse head and shoulder pattern. In such cases, the neckline is usually retested and this means that we should see a dip that needs to be purchased.
This dip may arrive in December when the Fed finally moved on rates. If that does happen, and the ECB cuts rates (as expected), and inflation in Europe doesn’t pick up, then the Fed and Europe will be moving in different directions within the same month for the first time since 1994.
In a world that is highly interconnected, this means chaos for the stock market in general. Any move from the Fed will be bearish on stocks, while a move from the ECB will be bullish. However, these scenarios may provide the perfect striking price for a call option on CAT from 67$/share area, and with a one-month expiration date.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
