In the last three weeks shares of Cummins International (CMI) fell more than 10%, closing out last week near their lows and on the 40 week (roughly 200 day) moving average. Caterpillar (CAT) held up well during this same period and traded in a narrow range just above the $135 level.
The correlation coefficient graph on the chart shows the close correlation between the two stocks. They trade in close coordination most of the time.
Directly below the correlation graph is a chart of the performance of Caterpillar relative to Cummins. It shows that for most of the charted period Caterpillar has been the under performer, that is until last August. Since then it has steadily outperformed its competitor, currently by about 20%.
The takeaway from these indications is that Caterpillar’s valuation is overextended and the pullback back in Cummins should moderate. In other words, there should be some normaliztion between the two stocks.