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Baltic Dry Index Continues Leading The Stock Market

Baltic Dry Index Continues Leading The Stock Market

Published September 7th, 2009 in Trading Tags: , , , , , , .

While the Baltic Dry Index is a leading economic indicator, lately, it has been also behaving as a leading indicator of the stock market.

I hinted towards this early in the year when it looked like it had put in a significant bottom and I wondered if the Baltic Dry Index would lead the stock market higher. Of course, we now know it certainly did.

The index measuring international shipping rates around the world bottomed in early December 2008 three months ahead of the stock market (green arrows):
Baltic dry index leading stock market SPX chart comparison Sept 2009

In fact, if you compare the S&P 500 index for the past few years with the Baltic Dry Index (BDI), it would seem that shipping rates have lead the equities from 1 to 3 months in both rallies and tops (take a look at the marked points on the chart above).

Of course, the relationship is fuzzy and not a one to one, up and down, direct correlation. But in all its fuzziness, you can still make it out rather clearly. You can even see that about a month before the stock market went into a waterfall decline last year, the BDI broke down below its low and started on its head first dive.

So what is it saying now?

The BDI topped out in early June 2009 at 4291 and has since been in a downtrend. In keeping with the same approximate time lag, we would expect the stock market to top out in late August or early September. Which is right about now. We’ve been underwater since the S&P 500 index hit 1031 on August 27th, 2009. Now, I’m not suggesting that you trade just on this type of thing but it does provide an interesting context. Especially when you consider everything else which is telling longs to be cautious.

If you just joined us, we went over multiple reasons for bearishness in the past weeks sentiment overview as well as the newly inflation adjusted mutual fund cash levels indicator.

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FT

Bears, keep the faith

Posted by Neil Hume on Sep 10 09:54.

It is not much fun being a bear at the moment with seemingly everything going up – except the US dollar. But there is still hope, according to Soc Gen’s Albert Edwards.

In his latest Strategy Weekly he draws our attention to the recent performance of the Baltic Freight index, which is some 40 per cent off its June high.

I was reading the other day the blog of my former colleague Daniel Pfaendler, who was making some interesting observations on bond yields and the Baltic Freight Index which we replicate on the cover chart. He believes the weakness of commodities is evidence that the Chinese commodity re-stocking cycle is drawing to an end. He cites Trader’s Narrative blog – that suggests equity investors should also be watching closely.

Here’s why.

14556.jpg

Scary huh? Albert thinks so.
An end of the Chinese bubble of belief will have serious consequences for the global financial markets. For those who are looking for a trigger for a retrenchment in equity markets, we suggest watching the RJ/CRB and Baltic Freight indices closely.

And here’s the recent performance of the RJ/CRB commodity index.

14576.jpg

Some way off its August highs.

And there’s one more thing Albert thinks investors should be looking for. (Emphasis ours).
It’s almost as if the biggest credit bubble in history never occurred.

Investors are increasingly convinced that a sustainable global recovery is emerging out of the wreckage. All praise to the central bankers (and Gordon Brown) for saving the world!

I’m waiting till someone writes about the return of The Great Moderation and suggests Ben Bernanke is the new Maestro. Then I’ll know the lunatics have taken over the madhouse…..yet again!

 

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September 10, 2009 - Posted by | Cross-asset-class

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