Baltic Dry Index is Down Up Down

Apr 15, 2009: 11:54 AM CST

Many analysts follow the Baltic Dry Index ($BDI) as a gauge on the possible future pathway of commodity prices.  The Index is a survey of what it would cost to ship certain raw materials by sea, which can sometimes be a leading indicator of commodity prices (supply and demand) themselves.  Let’s look at the Index both on a weekly and daily frame to see recent strength… which gave way to even more recent weakness.

Remember that the CRB Index (and Crude Oil particularly) peaked in late July/early August 2008 while the Baltic Dry Index ($BDI) peaked two months earlier in May, giving a leading relationship.

Recently, the index bottomed in December 2008 though the CRB Index made a lower low in February 2009.  Look at the chart of Crude oil and a few other commodities to see a very similar “rounded reversal” pattern that took place into these lows.

The main takeaway is that the $BDI bottomed in late 2008 and then more than doubled in price  into the March 2009 highs… though the index has fallen 50% from that level.  To say the $BDI is a volatile index is quite the understatement – luckily, commodities themselves do not fluctuate so wildly.

Some analysts are reading future economic strength into the apparent bottoming-out of the Baltic Dry Index.

Let’s see the $BDI and $CRB relationship recently on a daily chart.

Baltic Dry Index and CRB Commodity Index Daily:

I’ve scaled the $CRB Index on the left axis and the Baltic Dry Index on the right axis.

If there is a 3 or so month lead, then this would indeed suggest that the $CRB might have further to run, but that possible weakness is ahead after the strength.  In other words, we’d possibly expect to see a similar (though not in percentage term) arc up then arc down in the broad CRB index.

Either way, at the moment, it appears that the CRB Index (along with crude oil) is completing a “Rounded Reversal” pattern which could have slightly further to run to the upside.

Continue watching the Baltic Dry Index and CRB Index for additional clues as we get more daily data.

Corey Rosenbloom
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Travel to the LA Trader’s Expo in June to hear Corey speak on “Idealized Trades for Intraday Traders”

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Comments
  • Anon,

    You may be precisely right - I'll have to look further into the China effect and how that plays in and I'm certain it does.

    Good call!
  • Kevin,

    haha - no prob!
  • Chris,

    I don't do as much individual stock analysis as I used to (I'm now in the ETF/Futures world) but Dry Ships DRYS pops first into mind - I've watched it for some time. Seems to be the most logical for a pure play.

    If any readers have other suggestions, feel free to share.
  • WoodFlooring,

    Thank you so much for reading and for your comment! This is a lot of fun to me and reader feedback like yours helps me keep going.
  • Mark,

    Of course - I just don't have the space in these mini-blogs to do full detailed analysis.

    I'm really just trying to point out key things to spur readers to dig a little deeper on these topics.

    Good link! Thanks
  • Anonymous
    Corey,
    Re BDI. I would not read too much into BDI at the moment. Most non china routes have been crushed and there is little in terms of seaborne traffic from and to the west. Shipping rates are extremely volatile currently and will remain so for sometime to come.

    IMHO, the BDI had been crushed and after an almost 90% decline a little recovery was in the cards. Secondly,China with its reserves, is likely stockpiling commodities at very attractive prices and there may be a temporary bump from that.
  • Oh -- I missed that. I started counting the triangle two limbs after you. No need to reply, thanks.
  • Corey,

    What are the two or three dry shippers should be looking at to enter based on index appearing to be putting in a higher low?
  • WoodFlooringGuy
    Cory,I stumbled on your site when searching for comparisons between 1929-2000 and 1938-2009 for the DOW. I have been checking in to see what your up to every other day or so. What your are doing is fascinating. As an observer, not a trader, I thought I would just say keep up the energy and good work. Remarkable.
  • Mark
    I think it's important for anyone analyzing an index to look at a longer term chart, and not just a "snapshot" in time.

    http://investmenttools.com/futures/bdi_baltic_dry_index.htm
  • No - you're not the only one. I pointed that out either in Sunday night's or Monday morning's post:

    http://blog.afraidtotrade.com/bearish-rising-wedge-in-the-sp500/

    I've heard in other circles that thought going around so that must be the dominant theme at the moment.
  • Corey, I know this is not today's topic, but am I the only one who sees a big ending diagonal / wedge potentially forming in SPY?
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