Dow Stock Flashing Reliable Buy Signal Again

CAT options are attractively priced

As trade war fears stir up tension on Wall Street, trade-sensitive stocks like Caterpillar Inc. (NYSE:CAT) come into focus. At last check, CAT was down 3.2% to trade at $136.30, but as the stock nears a familiar trendline, history suggests this pullback could present a buying opportunity for the Dow name.

Specifically, the equity is trading within one standard deviation of its 80-day moving average, after a lengthy stretch above it. According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been seven other times in the last three years CAT stock has tested support at this trendline, resulting in an average one-month gain of 5.1%, with 83% of those returns positive.

Based on its current perch, a move of this magnitude would place the Dow stock around $143, toppling short-term resistance at the $140 level. CAT has spent most of 2019 etching out a channel of higher highs and lows, but only has a 7% gain to show for it. It makes sense then, that analyst sentiment is evenly skewed. Of the 17 brokerages covering the security, eight rate it a "buy" or better, and the other nine rate it a "hold" or "strong sell."

In the options pits, CAT's Schaeffer's put/call open interest ratio (SOIR) of 1.07 sits in the 83rd percentile of its annual range, showing a rare put-skew among near-term traders. As such, an unwinding of all these bearish positions could fuel upside for the equity.

Options looked to be an ideal vehicle to bet on more upside for CAT too, with the security's Schaeffer's Volatility Index (SVI) of 22% ranking in the 7th percentile of its annual range. This indicated short-term options were pricing in relatively low volatility expectations at that time.