Caterpillar’s (NYSE: CAT) stock has seen significant volatility this year. While the company is being impacted by growing headwinds to the global economy, the uncertainty surrounding the trade war between the U.S. and China, relatively mixed quarterly earnings reports as well as slowing sales, its relatively high capital returns and strong balance sheet have supported the stock to an extent.
Considering the recent price swings, we started with a simple question that investors could be asking about Caterpillar stock: given a certain drop or rise, say a 5% drop in a week, what should we expect for the next week? Is it very likely that the stock will recover the next week? What about the next month or a quarter?
In fact, we found that if the Caterpillar stock drops 5% in a week (5 trading days), there is a ~22% chance that it will rise by 10% over the subsequent month (20 trading days). Want to try other combinations? You can test a variety of scenarios on the Trefis Machine Learning Engine to calculate if Caterpillar stock dropped, what’s the chance it’ll rise.
For example, after a 5% drop over a week (5 trading days), the Trefis machine learning engine says chances of an additional 5% drop over the next month, are about 23%. Quite significant, and helpful to know for someone trying to recover from a loss. Knowing what to expect for almost any scenario is powerful. It can help you avoid rash moves. Given the recent volatility in the market, the mix of macroeconomic events (including the trade war with China and interest rate easing by the U.S. Fed), we think investors can prepare better.
Below, we also discuss a few scenarios and answer common investor questions:
Question 1: Does a rise in CAT stock become more likely after a drop?
Consider two situations,
Case 1: CAT stock drops by 5% or more in a week
Case 2: CAT stock rises by 5% or more in a week
Is the chance of say a 5% rise in CAT stock over the subsequent month after Case 1 or Case 2 occurs much higher for one versus the other?
The answer is absolutely!
Turns out, chances of a 5% rise over the next month (20 trading days) is meaningfully more for Case 1, where the CAT has just suffered a big loss, versus Case 2.
Specifically, chances of a 5% rise in CAT stock over the next month:
= 40% after Case 1, where CAT stock drops by 5% in a week
= 32% after Case 2: where CAT stock rises by 5% in a week
Question 2: What about the other way around, does a drop in CAT stock become more likely after a rise?
Consider, once again, two cases
Case 1: CAT stock drops by 5% in a week
Case 2: CAT stock rises by 5% in a week
Turns out the chances of a 5% drop after Case 1 or Case 2 has occurred, is actually quite similar, both pretty close to 23%.
Question 3: Does patience pay?
According to data and Trefis machine learning engine’s calculations, absolutely!
Given a drop of 5% in CAT stock over a week (5 trading days), while there is only about 21% chance the CAT stock will gain 5% over the subsequent week, there is more than 50% chance this will happen in 6 months, and 62% chance it’ll gain 5% over a year (about 250 trading days).
The table below shows the trend:
Question 4: What about the possibility of a drop after a rise if you wait for a while?
After seeing a rise of 5% over 5 days, the chances of a 5% drop in CAT stock are about 24% over the subsequent quarter of waiting (60 trading days). However, this chance drops slightly to about 23% when the waiting period is a year (250 trading days).
The table below shows the trend:
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