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):
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.
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