The Market Never Falls Anymore
Even though the Dow was overbought heading into the week, the biggest determining factor for how it would go was earnings. This shows how technical analysis has its limits when news is released. The Dow rallied 0.73% because Caterpillar and 3M reported great results. These reports are evidence of the strong global economic recovery. Before we look at their results, let’s look at the latest streaks the S&P 500 has gone through without corrections of various sizes. As you can see from the chart below, the streak without a 5% correction is 331 days; we’re closing in on the longest streak in that category. It has been 425 days without a 10% correction which isn’t a long streak. It has been 2,170 days without a 20% correction which the second longest streak ever. It shows that the fact that we are in the longest streak without a 3% correction isn’t a completely random event. Volatility has been suppressed and corrections don’t happen as much.
Caterpillar – CAT And 3M Had Great Earnings
As I mentioned, Caterpillar – CAT had a great quarter. It shows that buying cyclical stocks when they are doing poorly and selling them when they do well makes sense. If you bought the stock in 2016 when the results were poor, but there was a glimmer of hope, you would have made a lot of money. I’m not saying now is the time to sell because the recovery has only just gotten started. However, most of the gains for this cycle have likely been made. CAT’s earnings for Q3 were $1.95 which beat estimates for $1.22. Revenues were $11.4 billion which beat estimates for $10.73 billion. Full year revenue guidance was $44 billion which was above estimates for $43.13 billion. Full-year earnings are now expected to be $4.60 which is an increase from the previous estimate of $3.50.
During the downturn in the 3 segments CAT operates in, the company focused on cutting costs which gave it operating leverage for when the recovery came. In the construction segment, CAT used to have margins in the low teens; now margins have been 18% for 2 straight quarters. The chart below breaks down the dealer sales growth by region. As you can see, all the segments are growing again, with Asia Pacific being the strongest. The Chinese soft landing is finally here as its economy has stopped the free fall.
