Getting Market Signals from the Baltic Dry Index

06/24/2010 12:01 am EST

Focus: STRATEGIES

Corey Rosenbloom

Founder and President, Afraid to Trade

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 it to the S&P 500:


Click to Enlarge

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 Baltic Dry Index bottomed in November/December 2008, prior to the March 2009 stock market bottom.  The sharp recovery in the Index preceded the 2009 stock market’s “straight-up” recovery, though $BDI became range bound 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 trend line 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:


Click to Enlarge

The $BDI (upper section of above 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, like stocks did, in April. The May stock market selloff looks somewhat similar to the December 2009 selloff 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 StockCharts.com—for any signs of a recovery or for further warning if the index continues its slide.

By Corey Rosenbloom, trader and blogger, AfraidToTrade.com

Related Articles on STRATEGIES