Everyone is trying to get a handle on the economy… from the Federal Reserve to your average investor.
Last week’s Q3 GDP data showed the economy growing at an annual rate of 2.8%. That was 0.2% below forecasts and lower than last quarter’s 3% figure.
Then the all-important jobs market offered us mixed signals.
Job openings continue to slide… but they’re still tracking just above pre-Covid levels.
Nonfarm payrolls (NFP) rebounded to 223,000 new jobs in September. Yet they added just 12,000 jobs in October. That was 101,000 lower than forecast.
Meanwhile, the unemployment rate remains steady at 4.1% after retracing from July’s 4.3% peak.
Add in the election and uncertainty about the Fed’s rate decision tomorrow, and it’s hard to know where things are headed from here.
That’s why I keep a watch on Caterpillar (CAT)…
CAT is the world’s largest manufacturer of mining, construction, and earthmoving equipment. As such, it offers insight into the U.S. and global economy.
So let’s take a look…
An Economic Barometer
The weekly chart below shows how much CAT has rallied in the last 4.5 years. Its recent all-time high represented a nearly fivefold increase from its March 2020 low.
That rally accelerated over the last 12 months. CAT gained nearly 80% from October 2023 to its recent high.
Caterpillar (CAT)
Source: e-Signal
Yet recent signs show that CAT is feeling pressure. And it could be vulnerable to a sell-off…
It reversed sharply off its October high and has drifted. Last week’s Q3 earnings exacerbated its fall.
CAT now expects 2024 revenue to come in below previous forecasts (and below 2023’s numbers). That’s due to weakening demand in its construction and mining equipment businesses, especially in its largest market, North America.
Given the slowdown, dealers are offloading their current stock before adding more inventory.
CAT’s pain also shows in its international businesses, with China still trying to recover from the crash in its real estate market.
While CAT’s Q3 earnings weren’t a big miss, it could be a harbinger of things to come – for itself and the broader economy.
From a technical perspective, a clear diverging pattern (orange lines) preceded this reversal…
Take another look:
Caterpillar (CAT)
Source: e-Signal
When the Relative Strength Index (RSI) makes a lower high like this, falling momentum will eventually pull the stock lower too. That’s especially true if the stock has been making higher highs.
And that is what we’ve seen…
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Watching Technical Levels
The next test is what the RSI does around support (green line). When it tested this support level from June through September, that level held.
If the RSI falls through support and gains traction in its lower band this time, the sell-off in CAT will gather more speed.
Longer-term, the 10-week Moving Average (MA, red line) crossing beneath the 50-week MA (blue line) and moving lower will add further weight to any down move.
CAT will need to take out its August 5 low to add further confirmation of that move. Given CAT’s role as a barometer of economic health, the broader market would likely fall lower too.
That’s one reason we’ll keep a close eye on CAT as market volatility picks up…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict