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Baltic Dry Index Continues Leading The Stock Market at Trader’s Narrative

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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16 Responses to “Baltic Dry Index Continues Leading The Stock Market”  

  1. 1 Max

    Awesome dude. Thanks

  2. 2 Mark

    Great points.

    I wonder how tight the correlation of the BDI is with the Shanghai SE Index?

  3. 3 sid

    great work, thanks!

  4. 4 J. Wilson

    If two charts are experiencing corrections and rallies with approximately the same frequency but at different phases, then any attribution of cause and effect or lead/lag is arbitrary. I could just as easily posit that stock market moves precede the Baltic by a few months. I.e., the March ‘07 stock market correction preceded May ‘07 Baltic correction; the Oct-Nov’07 stock market correction preceded the Nov-Jan Baltic correction, etc.

    In fact, on a longer time frame, the stock market topped (Oct. ‘07) well before the Baltic did (May ‘08). Sure, the order reversed in this year’s bottom, but maybe that just means these two indexes aren’t so correlated on short or intermediate time frames after all.

  5. 5 Senta

    I agree with Wilson. Could this mean that there is now greater supply on new ships which were ordered during the boom years. It takes around 2 years for the order to deliver for ships. The chickens are coming home to roost.

  6. 6 frei

    does anybody know at what time the BDI publishes daily rates? thanx

  7. 7 Babak

    frei, I’m not sure but you can ask them:

  8. 8 Patricia

    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


  9. 9 W.Nilsow

    @J.Wilson - what a load of gibberish. for the time frame of the chart, it looks pretty correlated to me….who cares if it correlates back to 2007. if the correlation holds for the next 6 months it will be a great tool…..

  10. 10 Derek

    seems to be a SMALL debate here on what the chart is saying–and while technical analysis can be debatable sometimes, from my perspective, the BDI looks like it lags the S&P, rather than leading stocks as the author suggests.

    This is clear from a couple data points:

    1.) October 2007 - the S&P topped out here, and officially started in the downtrend (defined as a period of lower lows and lower highs). Meanwhile the BDI rose to new highs all the way out in spring-summer of 2008, something the S&P did not eventually do as we all may gruesomely recall.

    2. Dec 08 - Mar 09 - while the BDI appears to have bottomed “first” you have to remember that short selling, inverse ETFs, fears of nationalization and a new administration in the white house all pulled the S&P to what in retrospect appears to be an artificial generational low in March. My point? The market did a lot of correcting both upwards (November, Dec,) and downwards (Oct, Jan-Feb) and during this uptrend a lot of #’s that would normally show INTENSE resistance have been shattered easily on the S&P. For example, 813–didnt hold because truth be told we probably should have never broken down beyond that level into the lows of late Feb/early March. In any trending or correlation study you have to do your best to ignore outliers and anomalies. March 2009’s bottom looks to be just that for now. Getting back to the BDI vs SPX, if you ignore March and instead look at where we bottomed in the fall, you’ll once again see that its the BDI following stocks and not vice versa. In fact, the BDI bottoming “first” is the only real data point that lends any credibility to the authors point–and given the notion of what a “generational low” is and our unlikely chances of returning there, the lows of March are not data points that I would begin building cases for a correlation against. Every other BDI peak and bottom seems to trail the SPX , further suggesting an anomaly in March for stocks.

    More importantly, I find many of these correlations useless, the more debatable, the more useless the correlation obviously is. That makes the BDI/SPX correlation about as useful as the weather forecast if you live on the equator. In other words, its going to be hot, you dont need a jacket today. Same here, forget the BDI, watch the long-term downtrend line on the SPX, which you can draw through the highs of Oct 2007 and then the reaction highs in Dec 07 May 08, etc. That downtrend line is on our doorstep, and barring a major move up or down on the SPX, we should “encounter” this resistance right around 1090, perhaps even higher if no pullbacks occur…if we hit that trendline before Columbus day, it willl be over 1100 where the clash occurs given the current slope of both trends. Thats all you need as an indicator. buy stocks until then, if you are skittish, sell them a week or so before any intersection of the 2 occurs. If you are bullish, a close above on a weekly chart strengthens your case. The extrmely sharp downtrend of mid-2008 through March 2009 has been broken, as we closed above reaction highs of that period. But any chartist will tell you we are officially in a longer term downtrend until the trend line from Oct 2007 is broken and we close above the reaction moves before the last bump against that line–meaning levels far above 1100. So lets just worry about how the SPX interacts with that downtrend line and 1100, and let the professors look for correlations to SCARE all of us into a selloff. lol

  11. 11 Rich

    Good discussion with a lot of good perspectives. During the last seven days, the BDI has fallen … would sure be reassuring that all this government spending is doing something real. The BDI index is painting a much different picture.

  12. 12 digitalchris

    Hi all - new to this site - interesting reading all round. The debate that ensued around whether or not the BDI preceeds or lags the S&P makes compelling points on both sides. I base my decision, not simply on this data that has been presented but on logic. This is my take (not being an Neo Classical economist, so my chances of being correct are significantly improved): if the BDI is dropping, this means that trade is falling right? This is what is occuring in the real world. I propose that there will be a lag between what occurs today for a shipping company and the official record of that occurrence within the bookkeeping of the company. But BEFORE that result is official as a company bookkeeping entry, the BDI being at the ‘coalface’ spots the trend ‘on the ground’ in the real world. Once the financial result of the drop in trade hits the company report and the S&P then the market reacts accordingly. That’s my view. I always had my eye on the BDI for this logical reason. Once I saw this data correlation done by the author of this site my logical theory seemed to be justified by the data. Well spotted.

    Additionally I noticed that there looked to be vested interests in the responses of those arguing that the S&P leads the BDI. Sounded like misinformation to me.

  13. 13 digitalchris

    Hi all - another point - country trade figures have equal lag to company trade results. This of-course will also effect sentiment and the S&P but can also be extrapolated out of BDI data.

  14. 14 J. Wilson

    “In keeping with the same approximate time lag, we would expect the stock market to top out in late August or early September.”

    The market did *not* top out in August or September, and it may not have topped out in October. The small June-July correction has yet to be equaled.

    “what a load of gibberish … if the correlation holds for the next 6 months it will be a great tool…”

    And if it doesn’t then it won’t be. Gibberish indeed.

  15. 15 Rich

    I would like to make a comment regarding analysis in response to J. Wilson comment:

    I think the original analysis was correct, but when you have corrupt public officials using government money to purchase S&P futures and thereby prop up a failed financial system, all normal rules of analysis are out the window.

    I am a an American Patriot and it makes me sick when I see the amount of money my children are going to have to pay for this mess.

    When this thing starts down, it will make 2008 look like a sunny day in the park!!!!!!!

  16. 16 wayne

    Rich, make sure you teach your children how to short the markets. They will have a chance to make it back.

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