Caterpillar: A Blood In The Streets Moment?

This article represents the opinions of Dr. Thomas Carr, also known as Dr. Stoxx.

Shares of Caterpillar Inc. CAT, the heavy equipment maker, have fallen hard over the past six months from a perch above $111 to their current price just below $80. That nearly 30 percent decline qualifies as a full-fledged bear market.

Last week week the company released worse-than-expected fourth-quarter earnings and a weak outlook for the coming year. The strong dollar is certainly hurting the world's largest construction machinery maker, as is lower oil, since the company has a huge exposure to the oil and gas industry.

The massive volume selloff, however, has an upside. It certainly has all the earmarks of a "blood in the streets" clarion call to all the contrarians out there.  Remember the Buffett-esque investment dictum: buy when everyone is selling, and sell when everyone is buying.  

More to the point: the post-earnings drubbing, coupled with recent weakness in the overall market, is in the process of knocking the price of Caterpillar shares down to a long-standing level of support. In the chart below you will see 2 key takeaways:

1) the $75 level has served as a floor for shares of Caterpillar since late-2011.  There is no reason to believe that that will give way anytime soon.

2) on the recent run-up to the $110-$111 area, the buyer-to-seller ratio in terms of sheer volume was the highest ever seen.  That bullish support for shares should act as a magnet for price once a bottom is established.

Just because the final panic likely occurred on the earnings announcement does not mean Caterpillar will start to climb immediately. Shares still need backing by institutional investors.  We are starting to see that already, with JP Morgan ("hold") and Stifel ("buy") both out yesterday confirming their price targets.  That has helped stabilize shares around the $79 level.  

Sentiment on the company remains bearish, however, and recent market volatility doesn't help matters. Nor does very negative sentiment about energy and mining, two key revenue drivers for Caterpillar.  Thus right now, shares of Caterpillar are in "wait and see" mode.  I personally am beginning to position myself for a rebound in oil, gas, and gold for the 2nd half of this year.

 Thus I am bullish on Caterpillar longer-term.  I like anything sub-$80.  And if it gets anywhere near $75, it's a "back up the truck" moment.  

Caterpillar also offers a nice 3.5 percent dividend.  If forced into shares, so much the better because the cost basis will be well below the $75 support level.  

And from there, one can sell calls until the shares are taken away to further reduce the cost basis.  

It can be a beautiful thing when there is blood in the streets!