Now is the right time for a shorter-term sentiment play on Caterpillar Inc. (NYSE:), a stock that has been up every day this year and eight straight days total, rising over 10% in just 2012 alone.
The company makes and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through three lines of businesses: Machinery, Engines and Financial Products.
Yesterday’s news out of China, where the company is establishing a foothold to gain exposure to its growing and potentially very lucrative construction market, provided a further impetus higher in the shares — which are now trading at the most overbought level on a 9-day Relative Strength Index (RSI) since last April.
The stock showed similar price action then, only to be met with a sharp 8% sell-off over the next few weeks and sideways action for the next several months.
I look for CAT to struggle going forward given the magnitude of the recent rally and the multiple expansion (now at a decent premium to the market), with the stock leveling off and closing down slightly at $95 by February expiration.
Based on CAT’s current market price of $99.96 and using a target price of $95, a target date of Feb. 17, 2012, and $1,000 of investment capital, this is an excellent candidate for capturing some short-term returns by buying the CAT May 100 Put or buying a February put spread.
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