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Baltic Dry Index, Commodities & The Stock Market




This is a follow up of an earlier article from a few months ago on the relationship of the Baltic Dry Index and the stock market. I wanted to revisit the thesis because it seems I'm wrong and I don't miss an opportunity to point out my errors in the hope that I can at least learn something from them.

My original article presented the Baltic Dry Index as a leading indicator for the stock market. There is some logical rational for that since the BDI tracks international trade and that tracks economic activity which eventually is translated into profits and eventually changes in stock prices. While he disagreed with this thesis, Albert Edwards of Societe Generale mentioned my article and chart in one of his research notes - making my month.

In September 2009 the chart comparing the relationship between the Baltic Dry Index and the S&P 500 suggested that the stock market was in peril. Thanks to 20/20 hindsight, we know that the market plodded along quite nicely. Since then the S&P 500 has gained about +15%.

Here's an updated chart of the BDI and the S&P 500 showing how the stock market has gone on to make new highs while the BDI is still mired in a sideways malaise:

baltic dry index comparison to stock market Mar 2010

As Daniel Pfaendler commented, there seems to be a more direct relationship between the Baltic Dry Index and the Thomson Reuters/Jefferies CRB Index:

baltic dry index comparison to CRB index Mar 2010

For those interested in doing further tweaking, I would suggest comparing the chart of the Baltic Dry Index with a Chinese stock market index like the Shanghai Composite. If nothing else, the limp commodities and shipping rates charts hint that deflation continues to have the upper hand in the epic economic struggle of the era.

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2 Responses to “Baltic Dry Index, Commodities & The Stock Market”  

  1. 1 Keith Piccirillo

    Respectfully, don't you need to drag the time frames out over longer periods of time?
    To quote Dr. Lo, "if you torture the data long enough, it will confess to anything".
    Mr. Hui of Humble Student of The Markets has said quants should be wary of assumptions that are made. Are not there many variables within the BDI, especially physical inventory turnover, is that built into such assumptions?
    I'm interested because I would love to buy back into a DRYS or similar stock seeing how it has not recovered values of September of 2007.

    seeking alpha

    chart of BDI

  2. 2 Keith Piccirillo

    Here's a six year overlay of the two

    Have a gander a the decoupling from 2005-2007, see the disconnect?
    CRBQ is heavily oil and ag based.

    http://finance.yahoo.com/q/hl?s=CRBQ

    Starting with higher correlated DRYS, medium correlated SEA, or lower correlated IYT is something I would like to see in a chart.

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