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Caterpillar Became an AI Stock
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Caterpillar has enjoyed a massive rally since April last year. Its shares have more than doubled since last September.
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However, that rally wasn’t driven solely by traditional construction, mining, and infrastructure spending. Caterpillar has also emerged as a beneficiary of the artificial intelligence (AI) boom.
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Building enormous data centers requires more than advanced semiconductor chips and computer hardware. Those facilities consume extraordinary amounts of electricity and need reliable power generation and backup systems.
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That has created another important source of demand for Caterpillar’s engines, turbines, and generators. So a company traditionally associated with bulldozers and mining trucks has also become part of the AI infrastructure trade.
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And Caterpillar’s most recent operating numbers have remained extremely impressive.
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Second-quarter revenue increased 24% from a year earlier, while revenue from its construction business rose 35%. Caterpillar also booked $9.4 billion of orders, taking its backlog to $72.1 billion.
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Yet the chart tells us something interesting. After surging through the $1,050 level around the end of June, Caterpillar began to roll over. Its stock price fell sharply throughout July, dropping below both its 10-day and 50-day moving averages (MAs).
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You can see that price action below:
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Caterpillar (CAT)
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Source: eSignal
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Caterpillar’s Q2 results in early August initially sent the stock sharply higher. Yet that move ran out of steam, with the 50-day MA (blue line) acting as resistance.
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Note also how the 10-day MA (red line) has stayed below the 50-day MA since they crossed over in July. And the Relative Strength Index (RSI), a momentum indicator, has remained stuck in the lower half of its range. That shows that sellers have retained the upper hand.
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Rather than marking the start of a new rally, that earnings spike became a lower high.
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The Background Story Isn’t the Trade
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At first glance, Caterpillar’s recent weakness might appear to warn us that the broader economy is slowing.
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But that doesn’t necessarily fit with Caterpillar’s recent results. Sales remain strong, its backlog is substantial, and data center construction has created another source of demand.
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Instead, the chart may tell us that investors had already fully priced in all the good news.
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Once expectations become too elevated, strong results may no longer be enough. A company must deliver numbers that substantially beat expectations.
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That’s what makes Caterpillar’s failed earnings rally so significant.
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Despite confirmation that the underlying business remains strong, buyers couldn’t push the stock back above its 50-day MA. The positive news generated only a temporary bounce before the downtrend resumed.
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That’s a valuable lesson for every trader.
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You might correctly identify that the economy remains healthy, infrastructure spending is increasing, and data center construction is creating new demand – that Caterpillar’s markets are growing.
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But if everyone else in the market has already identified the same thing, there may not be enough buyers left to push the stock higher.
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Before opening a position, consider what’s already priced in and whether the technical setup supports the trade. When a stock can’t hold a rally after positive news, that can tell you more than the headline numbers.
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Caterpillar can remain an excellent company, and the economy can remain healthy. Yet against that backdrop, Caterpillar can still be the wrong trade at the wrong price.
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Happy Trading,
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Larry Benedict
Editor, Trading With Larry Benedict
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