Miller Tabak Looking to Caterpillar as a Barometer of Sorts for the Industrial Sector

Sometimes you can distill the performance of an entire market based on a handful of stocks, or even just one. It's often connected to a range of other operations, and thus, if it performs poorly, many others are too. It's why copper is often called “Dr. Copper,” thanks to its connection to hordes of industrial applications. A new such doctor may be on the market, if Miller Tabak has the right of it, and that recently hung shingle reads “Dr. Caterpillar.”

The Fate of a Sector in Your Hands

That's right, Miller Tabak is looking to Caterpillar NYSE: CAT as a barometer for the overall industrial sector. Some might wonder here why the sector really needs a barometer to begin with; after all, the XLI NYSEARCA: XLI exchange-traded fund (ETF) for the industrial sector is up 16% for the last month. That's nearly double the 9% gain seen in the S&P 500 as a whole for the same period.

But, as Miller Tabak chief market strategist Matt Maley explains, that could be just the problem. That's why he's looking at Caterpillar to serve as a barometer for the sector, because it may ultimately represent the entire sector in microcosm.

A Look Under the Hood of a Sector Barometer

Maley pointed out that, so far, Caterpillar has been acting quite well. It, like most other firms in the sector, went down during the initial days of the coronavirus outbreak, but then made a recovery as well. Until a brief hiccup in the last few days, Caterpillar was actually trading up around where it was pre-coronavirus, back in February. That isn't lost on Maley either, noting that it not only made a “higher high” in its first comeback but made that high “a very meaningful one” to boot.

Here's the part that has Maley watching Caterpillar closely, though; Maley's key concern is that Caterpillar may have been overbought in producing those higher highs and very meaningful highs. Checking its relative strength index reveals a score of 74, which will raise alarm in those who note that a relative strength score greater than 70 suggests that the stock in question may be overbought.

The next point to watch, therefore, is the 200-day moving average. Caterpillar has briefly broken that line a couple times in the last few weeks, and is holding fairly close. Maley notes that if the stock comes down and stays under that average in any substantial way, it would suggest the entire industrial sector may be getting ahead of itself, and that the industrial economy might have a rougher road ahead than the consumer sector. Meanwhile, if Caterpillar can hold its 200-day moving average reasonably well, or even exceed that figure, there could be some real potential for upward mobility in the entire sector.

A Certain Skepticism in the Rest of the Analysis Front

Some are less sure an entire sector can be boiled down to one representative stock. Strategic Wealth Partners' president, Mark Tepper, notes that there are other opportunities afoot and it's worthwhile to be picky about things. Tepper, for example, thinks that a combination of low expectations and growing pessimism might be good for Raytheon Technologies NYSE: RTX. With Raytheon also down 23% on the year, it's a worthwhile notion that Raytheon could be in line for a general-sector comeback.

While it might not exactly be the greatest idea to suggest that one stock represents the fate of the whole sector, there is a value in picking Caterpillar for that barometer. Why? Heavy equipment. Caterpillar is one of the world leaders in heavy equipment manufacture. Backhoe loaders, asphalt pavers, drills, forestry machines...these and a host of others make up the Caterpillar line.

If Caterpillar's sales improve, that means two key things: 1. Businesses believe enough in overall opportunities in their markets to make the purchase of new hardware worthwhile, and 2. Businesses have sufficient capital to actually make these purchases to begin with. If one part of this equation falls down, then the whole thing can't stand.

With a potential new infrastructure push coming out of Washington in the coming days—the fact that there's an election ahead for an incumbent president whose biggest issue was the economy—the chances that there will be a lot of new infrastructure spending coming up isn't lost on anyone. Caterpillar could indeed be in the right position to capitalize on this as spending on roads and bridges and high-speed internet access spikes, and that could help drive the entire industrial sector up right alongside it.