Dow Jones Heavyweight Sets Up For One-Of-A-Kind Cycle – Investor's Business Daily

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Cup
A cup-shaped pattern with no handle. Must be at least six weeks long or as long as a year. Buy point is 10 cents above the left-side high.
Caterpillar (CAT) is Thursday’s IBD Stock Of The Day as the construction and mining equipment giant heads into a one-of-a-kind economic cycle. CAT stock, a Dow Jones component, has staged a massive 46% rally since bottoming in late September. Now Caterpillar is revving its engine, just below a buy point.
With the global economy potentially sliding toward recession in 2023, the timing seems unusual for CAT stock to be making a big move. Even in a soft landing, residential construction, which accounts for 25% of Caterpillar’s construction industry sales, is going into the tank. And China, which drives a lot of the demand for global commodities, continues to struggle. That would typically weigh on mining investment.
But Caterpillar has so many other things going in its favor, starting with three big Biden-era spending packages. Together they could plow $1 trillion into earth-moving projects over a decade, starting with the $500 billion in new infrastructure spending approved in the fall of 2021.
Then, over the summer, Congress passed the CHIPS Act to boost domestic semiconductor production with up to $250 billion in authorized funding. And the Inflation Reduction Act will put up $369 billion to expedite the mining projects and the build-out of green energy infrastructure. That includes factories to make EV batteries, photovoltaic cells and wind turbine blades.
Those latter two bills tap into the push to build a domestic supply chain for critical inputs. That has become all the more important amid Russia’s invasion of Ukraine and growing tensions with China.
Caterpillar’s energy-sector business also stands to benefit from Europe’s push to secure non-Russian energy capacity, including the buildout of terminals for shipping LNG.
As Wall Street probes potential weak spots in the thesis of a sustained investment upcycle for Caterpillar, there’s more reason to be reassured. Strong order backlogs are providing a degree of visibility, while Caterpillar says that dealer inventories are at the low end of the typical range.
CAT management says the company can pivot quickly if conditions warrant, as it did when sales tanked after Covid hit. “We still met our margin targets that year,” CEO Jim Umpleby said in the Q3 earnings call on Oct. 27. “So again, we know what to do. But as we sit here today, even though we’re watching things very closely, we continue to see healthy demand across most of our end markets.”
CAT stock’s six-week run that began at the end of September — including an 8% jump on blowout Q3 earnings — has been taking a breather since Nov. 14, while trading in a tight range. In Thursday afternoon action, CAT stock dipped 0.3% to 235.69.
There are a couple of ways to look at CAT’s stock chart, all of them on point. The recent sideways action could be seen as a handle on a long consolidation back to June 2021, offering a 239.95 buy point.
On a shorter time frame, CAT’s recent run took it to the cusp of a 238 cup buy point. The Dow Jones giant nosed above that buy point on a few occasions. However, it failed to hold that ground, closing just out of buy range each time. That 238 buy point is still operative.
A longer pause might be constructive at this point. After its sharp climb, CAT remains above its 21-day moving average and more than 15% above its 50-day line.
Another positive for Caterpillar stock: Several other heavy equipment plays are doing well. Among them are Deere (DE), United Rentals (URI) and Titan Machinery (TITN).
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After enduring a painful bear market in stocks in 2022, investors are searching for signs of what’s to come in 2023. (© Gary Neill)
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