CAT has been a favorite short of ours for the past year. We’ve rattled off all of the negatives in our past 3 trade posts (here, here, and here), so I won’t rehash that here.
Yesterday, I discussed the bounce in Chinese-related assets in my Macro Wrap. I mentioned that GS Research put out a constructive note, with this takeaway:
However, judging by our client conversations, slower activity momentum in China seems to be the consensus view. Therefore, it would likely be a positive surprise if activity were to stabilise or indeed pick up in the second half of the year, as we forecast.
So they’re taking a bit of a contrarian view on China. Amid all of this week’s headlines about better than expected Chinese data though, the Citigroup Economic Surprise Index is still firmly negative:
In fact, Chinese data has consistently missed for most of the past year. Might be a little early to be calling for green shoots.
More importantly for CAT, the technical picture looks interesting here:
[caption id="attachment_29071" align="alignnone" width="636"]
Daily chart of CAT, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]
The 79-80 level has served as support for a couple years now. The stock has bounced a bit after a weak earnings report, but has failed to break above the declining 50 day moving average. The consolidation since earnings has resulted in a weak bounce that’s a nice setup for another short entry, looking to play for a move down to the 79-80 area in the near term.
TRADE: CAT ($83.90) Bought the Sept 85 / 77.5 Put Spread for $2.30
-Bought 1 Sept 85 Put for 2.74
-Sold 1 Sept 77.5 Put at 0.44
Break-Even on Sept Expiration:
Profits: Profits up to 5.20 when stock between 82.70 and 77.5, max profit of at 77.5 or below
Losses: Up to 2.30 between 82.70 and 85, max loss of 2.30 at 85 or above
Trade Rationale: We thought about structuring this trade as a put fly, but September expiry is still 6 weeks away, so if CAT does move lower in the next couple weeks, we wouldn’t make much money on a fly. As a result, we chose the put spread, which also reflects our view that 85 will be stout resistance in CAT going forward. We will likely take this trade off on a move to the important 79-80 support area.