Its hard to find a larger beneficiary of the rotation year to date out of high valuation growth stocks into low growth large cap “defensive” issues like Caterpillar (CAT). Prior to today’s 4% decline, the stock was up 16% on the year, and rising to two year highs. This morning the company issued April machine sales data that fell short of expectations and continues to show challenges in emerging markets, particularly in China. And just like that, the fairly tale that has been CAT’s recovery has temporarily been put back on the shelf.
The chart below of CAT since Jan 1, 2013 shows last year’s range-bound action with the a wash out in early Jan heading into Q4 results in late January (circled), and then BAM, off to the races:[caption id="attachment_40744" align="aligncenter" width="600"] CAT Since Jan 1, 2013 from Bloomberg[/caption]
In the very near term, $100 will be an important level for the stock to hold, and then $95, which would be almost a 50% re-tracement between the 2014 lows in Jan and the recent highs. Today’s move is the second largest one day move of the year, and the largest decline has awoken options traders, or possibly long holders fearing further declines. Total options volume is running 2.5x avg daily volume, with puts outnumbering calls 2 to 1. The top 4 most active lines at all puts: 5k June 100 puts, 4k July 97.,50 puts, 3k May 23rd 100 puts and 3k May 23rd 103 puts, most looking like they were bought.
Like most large cap stocks, CAT options prices have been rather depressed of late, recently making new 5 year lows:[caption id="attachment_40745" align="aligncenter" width="600"] CAT 5 year chart of 30 day at the money implied vol from Bloomberg[/caption]
Options prices are cheap, and for those looking to play for further declines, a bounce, or protection, today’s uptick in vol should not deter. To the downside I’d imagine that implied volatility would pop on any break below 100 as there’s a bit of an air pocket below.