We’ve opened a bearish trade on Caterpillar (CAT).
Every day, we get more data confirming the global economy is slowing down. Recently, the confirmation came from Japan, as it announced it has dipped into recession for the fourth time since the “Great Recession” that unfolded in the aftermath of the 2008 financial crisis. With each new confirmation, the outlook for Caterpillar’s growth prospects dims.
We are not only seeing a slowdown in large-scale infrastructure projects from China to Brazil but also witnessing a virtual cessation of new mining and oil-exploration developments as the price of precious and industrial metals collapses along with the price of oil.
On Nov. 12, Caterpillar saw its stock get hit by the news that Finning (FINGF) — a Vancouver-based large-equipment dealer — was cutting an additional 1,100 job and closing 11 facilities as it tries to cope with slowing demand from commodity producers across Canada. Although it has tried to recover, Caterpillar’s stock continues to show signs of weakness, and we anticipate it is going to continue falling in the near term.
CAT continues to consolidate at resistance. We like the position and expect the gap that opened on Nov. 12 to keep a lid on prices. Caterpillar will have to break through support near $67.50, but we anticipate it will eventually drop back down toward its recent lows around $65.
A large number of option traders are focusing on the January 65 strike price, which currently has open interest of more than 13,200. This tells us we are not alone in our outlook on Caterpillar and that there should be plenty of liquidity to allow us to easily get into and out of our trade.
‘Buy to open’ the CAT January 65 Puts (CAT160115P00065000) for a maximum price of $1.95.
A quick update, too, that we alerted our SlingShot Trader members to take their small profits in the General Electric (GE) calls we recommended last week. GE has done a phenomenal job holding onto its gains in the face of an incredibly bearish market recently, but we don’t want to press our luck if the market downturn continues. Even the strongest stocks will find it hard to hold on to bullish gains if we see the S&P 500 continue to drop. We recommend taking profits off of the table.
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InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.
