Be Careful Ahead of Caterpillar Earnings

Caterpillar will report earnings before the open this Monday

by Patrick Martin

Published on Jan 24, 2019 at 11:42 AM

Blue chip construction concern Caterpillar Inc. (NYSE:CAT) is as trade-sensitive as they come, and the stock could be volatile next week during high-level U.S.-China trade talks -- especially following this morning's discouraging comments from Commerce Secretary Wilbur Ross.  Putting added pressure on CAT is its fourth-quarter earnings report, slated for before the open on Monday, Jan. 28, while the Dow stock also just ran up to a trendline with historically bearish implications. 

More specifically, CAT is trading within one standard deviation of its 160-day moving average. After the last two times Caterpillar rose to test resistance at this moving average after a lengthy stretch below it, the equity was down 5.1%, on average, one month out, with both of those returns negative, per data from Schaeffer's Senior Quantitative Analyst Rocky White.

At last check, Caterpillar stock was up 0.6% to trade at $132.25, so a drop of similar magnitude would put the Dow name back below its year-to-date breakeven point of $127.07. CAT is coming off a fourth straight weekly win, but is on pace to snap this streak tomorrow -- down 3.2% so far -- and has shed 21% in the last 12 months.

Daily Stock Chart CAT

As for the company's earnings history, it's rather bearish. The stock has closed lower in the session following its last three quarterly reports, including a 7.6% drop back in October. Overall, the equity has averaged a historical earnings move of 4.5% in the past two years, regardless of direction. This time around, the options market is pricing in a 7.1% next-day move for the security, according to implied earnings deviation data.

In the options pits, the mood is almost extremely bullish. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), CAT's 10-day call/put volume ratio of 2.04 ranks in the 90th percentile of its annual range, meaning calls have been bought to open over puts at a healthier-than-usual pace in the last two weeks.

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