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Caterpillar Inc. (CAT), Alcoa Inc (AA): Cyclicals Lead the Dow More Than 100 Points Higher

Although we don’t believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes — just in case they’re material to our investing thesis.

China reported better-than-expected economic data over the weekend, leading cyclical stocks to push the Dow Jones Industrial Average up. As of 1:15 p.m. EDT the Dow is up 120 points to 15,042. The S&P 500 is up 12 points to 1,667.

There were no U.S. economic releases today. Over the weekend China released its balance of trade report, which showed that exports increased more than imports, increasing the country’s trade surplus to $28.6 billion. Exports rose by 7.2%, besting July’s 5.1% increase and analyst expectations of a 6% rise. Imports rose just 7%, slower than July’s 10.9% increase and expectations of an 11.3% rise. This means the export-led economy is not slowing as much as previously feared. China also reported inflation of 2.6% — a tenth of a percentage point less than in July and in line with analyst expectations.

Caterpillar Inc. (NYSE:CAT)

Because China is one of the largest economies in the world and one of the world’s largest commodity-users, a slowing Chinese economy is bad for cyclical stocks whose results largely depend on the growth in the world economy. Following the better-than-expected news in China, cyclical stocks are leading the market higher today. Caterpillar Inc. (NYSE:CAT) is today’s top Dow stock, up 3%. Caterpillar Inc. (NYSE:CAT) sells large construction equipment around the world, and its large equipment sells well when construction is booming. China’s growth for the past few decades has been led by large investments in infrastructure, which have been, in turn, a boon for Caterpillar Inc. (NYSE:CAT), which supplies China’s construction industry, as well as Australia’s mining industry. If China’s economy continues to slow, both countries’ economies will take a hit, doubly hurting Caterpillar Inc. (NYSE:CAT). This weekend’s positive economic reports from China are a good sign for both economies — so long as the growth holds.

Second for the Dow today is Alcoa Inc (NYSE:AA), up 2%. Alcoa has been hurt the past few years by oversupply in the aluminum market, which has greatly pushed down prices for the commodity. Alcoa Inc (NYSE:AA) continues to take action by closing its highest-cost plants in an effort to lessen the market oversupply. Competitors like RUSAL are doing the same, but the large oversupply will likely continue as Chinese firms continue to slowly add to supply, even though it is not profitable. All is not lost for Alcoa Inc (NYSE:AA): The resurging automobile market in the U.S. should help the company as manufacturers use more aluminum in their quest for more fuel-efficient cars. That said, it is likely to be some time before Alcoa Inc (NYSE:AA) returns to significant profitability.

There are many different ways to play the materials sector, and The Motley Fool’s analysts have uncovered an under-the-radar company that’s dominating its industry. This company is a leading provider of equipment and components used in drilling and production operations, and it’s poised to profit in a big way from it.

The article Cyclicals Lead the Dow More Than 100 Points Higher originally appeared on and is written by Dan Dzombak.

Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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