Should investors keep a beady eye on the BDI (Baltic Dry Index)?

What makes successful investing in the stock market (or mutual funds) such a challenge (or, intellectually stimulating – depending on your mental makeup) is the wide variety of factors and indicators that you need to keep track of. The Baltic Dry Index (BDI) is one such indicator that many investors may not have a clue about.

What is the BDI, and why should investors keep a watchful eye on it? This is how wikipedia.com describes it:

The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. … the index tracks worldwide international shipping prices of various dry bulk cargoes.

The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore, and grain."

In plain English, the BDI gives an indication of international rates for transporting raw materials by sea in cargo ships of different sizes – based on supply and demand of commodities.

Why should stock or funds investors be interested in the current state of the BDI? Most economic indicators, like consumer spending, unemployment figures, housing starts are lagging indicators. That means, we get to assess the implications after the events have already occurred.

However, the BDI is a leading economic indicator because increasing demand for raw materials (which leads to higher shipping rates) is a signal of greater economic activity. That in turn, leads to growth and higher stock prices. Likewise, a fall in the BDI indicates declining demand for raw materials, leading to reducing economic growth and a likely slide in stock prices.

Unlike stock and commodity exchanges, where speculation is an important part of the overall activity and may camouflage the actual supply-demand equation, the BDI is free of any speculation since the index is based on shipping rates on various representative routes submitted by international shipbrokers who have actual cargo to transport.

Supply and demand of raw materials is not the only reason for changes in the BDI. Availability of cargo carriers, heavy traffic on certain routes, bad weather, price of oil can all contribute to higher shipping rates. Like all indicators, the BDI can’t be used in isolation.

Over the past year, the BDI has fluctuated between a high of about 2750 in Oct ‘10 and a low of about 1050 in Feb ‘11. It rose sharply from 1270 in Aug ‘11 to its current level of 1890. Is it indicating that the global economy may not be in the doldrums that many economists are suggesting?

Dow Jones (DJIA) Index Chart Pattern - Jul 16, '10

In last week's analysis of the Dow Jones (DJIA) index chart pattern, I had made the following observations:

'A fresh attempt may be initiated by the bulls to rise above the 200 day and 50 day EMAs. The 1 year bar chart pattern of the Dow Jones (DJIA) index shows that the bears are not quite ready to surrender their advantage...The Jun '10 top of 10627 needs to be conquered before the bear grip is weakened.'

The chart pattern pretty much followed the script - managing to move above both the 50 day and 200 day EMAs, but falling short of the Jun '10 top.

The bears took the opportunity to go on a selling spree. The week's trading saw the highest volumes on Friday, as the Dow fell more than 250 points and closed 100 points lower on a weekly basis.

The 6 months closing chart pattern of the Dow Jones (DJIA) index clearly shows that the bearish pattern of lower tops and lower bottoms remains in tact. The bulls may point out that the downward momentum has slowed down.

In spite of Friday's big fall, the technical indicators are not looking too bad. The 50 day EMA has not sunk below the 200 day EMA, keeping bullish hopes alive.

The slow stochastic is above the 50% level, but has turned down. The ROC and RSI are both above their 50% levels. The MACD is marginally positive and above the signal line. The latter is also showing positive divergence - making a higher bottom in Jul '10 as the Dow made a lower one.

The bulls may try to re-group and launch another pull back effort. But the fundamental news continues to be dreary. The Baltic Dry Index and industrial production figures are sliding. As per this article, mortgage applications for home purchases have dropped to a 13 year low, and real unemployment rate is more than double the official rate of under 10%.

The Dow has been trading between 9500 and 10500 for two months, and may continue to do so for some more time. The likely break from this range is downwards. Looks like it may be a slow grind down. Note that of late, the drops below the 200 day EMA are going deeper and the rises above the long-term average are less steep.

Bottomline? The chart pattern of the Dow Jones (DJIA) index is in a bear grip once more. The bulls haven't lost hope, so trading volatility should be a given. Not a market for investors to prosper, but a trader's delight.

Dow Jones (DJIA) Index Chart Pattern - Jul 09, '10

The chart pattern of the Dow Jones (DJIA) index pulled back smartly from the previous week's low of 9596. The bulls regrouped during the long weekend and tried to assert their independence from the bears.

The possibility of a bounce up from the 9500 level was mentioned in last week's analysis, as it corresponded with the 38.2% Fibonacci retracement level of the bull rally from the Mar '09 bottom to the Apr '10 peak.

In technical analysis, as in a game of horseshoes, 'close enough' works most of the time. Exact levels, like 'ringers', are hit less often. So, 9596 is treated as 'close enough' to 9500.

What is amazing is how the 200 day EMA comes in to play repeatedly on chart patterns. Last week's smart pull back stopped almost exactly at the 200 day EMA. But it ensured that the 'death cross' of the 50 day EMA below the 200 day EMA was avoided. The technical confirmation of a bear market is still awaited.

A fresh attempt may be initiated by the bulls to rise above the 200 day and 50 day EMAs. The 1 year bar chart pattern of the Dow Jones (DJIA) index shows that the bears are not quite ready to surrender their advantage:

Note that the bearish pattern of lower tops and lower bottoms, which started after the Dow hit the Apr '10 high of 11309, is unchanged. The Jun '10 top of 10627 needs to be conquered before the bear grip is weakened.

Volumes actually declined on the last two days of the week (not shown in the chart) as the Dow inched higher. Expect the bears to put up a good fight in the zone between the 50 day and 200 day EMAs.

The technical indicators have improved but have not turned bullish yet. The MACD has just moved above the signal line, but remains in negative territory. The RSI bounced up from the oversold zone, but is below the 50% level. The slow stochastic has also emerged from its oversold zone and has reached its mid-point.

The fundamental news continues to be a mixed bag. The rate of unemployment is decreasing, but remains the highest since the early 1980s. The Baltic Dry Index has started to drop sharply after moving sideways for a few months. The Euro has regained some of its losses against the Dollar.

Bottomline? The chart pattern of the Dow Jones (DJIA) index is at a technically significant juncture, but the bias is negative. A resumption of the down move can provide shorting opportunities for traders. Investors can continue to wait for lower entry points.