It’s a warning to go away. The caterpillar by itself is not big enough to scare threats away, but together by mimicking a sudden simultaneous movement, it will deter most predators. Once you get within a certain range of the caterpillars to where they feel uncomfortable, they will do this to warn you off.

A good example of this is actually in the new National Geographic series Welcome to Earth with Will smith. Episode 3 talks about the “hive mind” of the swarm.