The 'early cycle' plays are simply on fire - no matter the valuation. Caterpillar (CAT), PPG Industries (PPG), Eaton (ETN) - all those names last week who beat on nothing but tax changes, headcount cuts, benefit reductions, etc etc. Not that it matters - valuation is a worry for the past in a momo dominant program trading era. The latest to surge on recovery is Masco (MAS) today.
CAT is now trading at 30x forward estimates for 2009. That said, I am going to begin a half size short position on Caterpillar and half size on PPG Industries. Only 2% exposure here at $42.90 for CAT. I will add on a spike to $44+ or if this thing finally begins to break down. You can see all the gaps but it would take a major selloff to fill them all, I will see how the stock (and market) is acting if and when we get to $39. I don't have a stop loss in for this one because I am actually going to build the short if it continues up. I guess I'll stop out at say 45x forward earnings. (sarcasm)
2% exposure on PPG just under $52.40 for exact same reasons as CAT but its a steal on valuation at 20x forward estimates. I'll add more higher (or when it begins to falter) even though I realize I am against an avalanche of institutional money who knows these are the go to stocks to buy ahead of recovery. The gap on this chart can be filled easily - the stock won't have to break any moving averages.
Short Caterpillar, PPG Industries in fund; no personal position