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Caterpillar Bears Brace for Longer-Term Downside

CAT's January put volume picks up steam

by 9/20/2012 2:41 PM
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Caterpillar Inc. (NYSE:CAT - 92.26) has been bombarded with bearish attention today, as data from the Philly Fed pointed to ebbing manufacturing activity in the region. Furthermore, financial information firm Markit revealed that the U.S. manufacturing sector turned out its weakest quarter in three years. At last check, roughly 38,000 puts have changed hands, more than doubling the equity's expected intraday volume. By comparison, call activity is running just 12% above the norm.

Traders seem to be favoring the out-of-the-money January 2013 85 strike, where more than 8,500 puts have been exchanged. A large block of these bearish bets traded for $3.50 per contract between the bid and ask prices and today's volume exceeds current open interest levels, pointing to the initiation of new positions. Assuming the puts were bought to open, the stock must retreat beneath breakeven at $81.50 (strike price minus net debit paid) by January expiration.

Further evidence of this penchant for puts over calls is CAT's Schaeffer's put/call open interest ratio (SOIR), which checks in at 1.24. In other words, puts outweigh calls among the front three-months' series of options. This ratio lands in the pessimistically skewed 71st percentile of its annual range, signaling that traders have been more put-heavy toward the security just 29% of the time during the past 12 months.

However, sentiment among brokerage bunch is tipping the bullish scales right now, as CAT boasts nine "strong buys" and three "buy" endorsements, versus eight "holds" and nary a "sell" rating to be found. Furthermore, the average 12-month price target for the construction equipment manufacturer rests at $107.21, reflecting expected upside of about 16% from its current perch.

Technically speaking, CAT has gained more than 18% during the past 52 weeks, and has bested the broader S&P 500 Index (SPX) on a relative-strength basis over the last 40 sessions. On the charts, the stock continues to trade atop its 40-month moving average, which has served as support since March 2010. However, the $94 level appears to be troublesome for the equity lately, and has not been surmounted since early May. Today's traders may be spooked by the aforementioned manufacturing data, not to mention a similarly downbeat manufacturing report from across the pond. Still, CAT will need to lop off an additional 13% -- on top of today's near 2% decline -- by January expiration in order for these skeptics to come out on top.

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