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Caterpillar's post-earnings drop could end rival Deere's run, market watchers warn

Caterpillar's post-earnings drop could end rival Deere's run

Nothing runs like a Deere ... until it gets mauled by a CAT.

That story may now play out following construction equipment maker Caterpillar's second-quarter earnings release on Wednesday, which sent the stock over 4% lower by the end of the trading session.

Plagued by rising material costs, tariffs and sinking demand in China, Caterpillar also cut its full-year earnings guidance, feeding into a theory that has worried investors since last year — that global manufacturing could be slowing down.

Worries about that theory playing out only grew louder as the IHS Markit U.S. Manufacturing Purchasing Managers' Index, which tracks the economic well-being of U.S. manufacturers, fell to 50 in July, its lowest level since 2009.

That could spell real trouble for longtime Caterpillar rival Deere, according to two market watchers.

"The correlation between these two companies or these two stocks has been quite strong," Matt Maley, chief market strategist at Miller Tabak, said Wednesday on CNBC's "Trading Nation." "However, you look at a 10-year chart [and] you see that it's kind of funny how every 18 months or so, they diverge from each other by quite a bit and then they stay diverged for several months."

There's little rhyme or reason to how those divergences resolve themselves, the strategist said.

"Sometimes, one falls to meet the other. Sometimes, one rises to meet the other," Maley said. "It's kind of a weird situation. Maybe the best way to play it is to short John Deere, which has been outperforming recently, and to go long CAT."

That weak manufacturing PMI number could be the catalyst that drives Deere — up 12% year to date — down to Caterpillar's depressed levels, said Maley, the man behind financial blog and newsletter Beyond The Fundamentals.

"This is the kind of thing that probably tells you that it's going to be John Deere that falls to play catch-up, or catch-down, to CAT," he said. "And this is particularly true because Deere wasn't able to break its double-top high at [$]120. Again, this thing could turn around immediately, but it's going to have to do it literally in the next few days or you're probably going to see this divergence resolve with a decline in John Deere."

Gina Sanchez, founder and CEO of Chantico Global, agreed about the muted prospects for Deere.

"The fundamentals actually support that idea that Deere probably has to fall, because if you look at the output, a PMI at 50 is balanced," she said in the same "Trading Nation" interview. "We're sort of waiting to see where this goes, and the market is trying to anticipate the bottom. But if you look at the commentary out of Caterpillar, ... there's concern around demand for bulldozers, demand for mining equipment. They're concerned about just general confidence weakening, and that [is] coupled with rising manufacturing costs, rising labor costs. So I would say CAT is probably the story and Deere needs to come down to that."

Deere shares closed less than 1% lower on Wednesday. Caterpillar shares notched a nearly 4.5% daily loss, putting the company's year-to-date gain at just under 4%.