Baltic Dry Index Decline and the SP500 June 22

Jun 22, 2010: 11:16 AM CST

Analysts are taking note of the recent 40% drop over the last month in the Baltic Dry (Shipping) Index, which is often seen as a leading indicator of global economic activity.

Let’s take a look at the weekly BDI chart and then drop the daily frame and compare the chart to the S&P 500:

The weekly chart above shows the Baltic Dry Index from mid-2008 to present.

Despite the scale of the chart, the index has appreciated 400% from its sub-1000 lows in late 2008 at the heart of the economic recession.

Notice that the BDI ‘bottomed’ in November/December 2008, prior to the March 2009 stock market bottom.  The sharp recovery in the BDI preceded the 2009 stock market ‘straight up’ recovery, though the BDI became rangegound between the 3,000 and 4,000 level… which is where we have remained for over a year now.

The weekly chart just broke a rising trendline at the 3,000 index value level last week, so we need to keep a close eye on that for any further signs of deterioration – which would be likely bearish for the global economy and equity markets.

Let’s take a look at the short-term daily chart and see how the BDI and SP500 have performed:

The BDI – upper chart – peaked at 4,600 in November 2009 though the stock market continued its rally.

Both formed a swing low in February 2010, though the BDI did not rally to a new high as stocks did in April.

The May stock market sell-off looks somewhat similar to the December 2009 sell-off in the BDI as seen above.

Just recently, the BDI peaked at 4,200 as stocks found a bottom in May/June… only to collapse almost straight down 40% as June progressed.  That’s not ultra bullish for the stock market.

Let’s remember to keep checking the Baltic Dry Index chart – symbol $BDI in – for any signs of a recovery… or further warning if the index continues its slide.

Corey Rosenbloom, CMT
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5 Responses to “Baltic Dry Index Decline and the SP500 June 22”

  1. Allen Jaffee Says:

    The Baltic Index as an indicator of global growth has been debunked many times over the past couple of years. This is a hoary old myth of sorts that does nothing but show that there's a relative ignorance about what the Index indicates. It works like this: if today I have 10 shipments of Stuff that have to absolutely get from here to there, but I only have 5 ships available, then demand is greater than supply and the Index goes up. Now, if TOMORROW, I have 5 shipments of stuff but 10 ships available, then the Index goes down. Yes, the Baltic spins on a dime that fast. Has the global economy suddenly imploded overnight? No. Supply and demand dictate the Index.

    Here's another reason why the Index fails as an indicator: ship supply. If the global economy is going gangbusters, like it was a few years back, then shippers are going to order more ships to be built. More ships invariably leads to idle ships because even though the miners are cranking out iron ore at capacity, there are TOO MANY ships to handle all of the loads. A better indicator is to look at the Capesize Index (BCIY Index on Bloomberg) and Panamax (BPIY Index on Bloomberg). Capes are the largest and should be the most expensive. But if more Panamaxes are being hired, it's a good indicator that demand isn't great enough to warrant hiring a Capesize that'll only be half-loaded.

    Do not blindly subscribe to the belief that the Baltic Index is an indicator of world growth. Do yourself a favor and spend a couple minutes talking with an actual shipping analyst or trader. Like me.

  2. Corey Rosenbloom, CMT Says:

    Thank you for sharing – the BDI is indeed not well-understood by the trading community.

    I think we all could use more education in this area.

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