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Baltic Dry Index: Does the Rally Mean "The Worst Is Over"?
A fresh look at the key global shipping rates indicator.
Last October, Japan's NIKKEI (Asia's equivalent to the DJIA) fell to a 26-year low.
Some investors surely saw that as a bullish sign because "things just can't get any worse." Here at Elliott Wave International, we use the Wave Principle and other important indicators to determine the trend. And on November 4, 2008, Chris Carolan, the editor of our Asian-Pacific and European Short Term Update publications, told his subscribers this:
"With so much of the Asian-Pacific region dependent on exports and those exports needing to be shipped, I’m using stocks like COSCO [China's major ocean freight company] ... as transportation ‘bellwethers’ for the region. COSCO is another waterfall chart, having fallen 88% from its high.
"What’s the news here? IT’S NOT BOUNCING! I think this is news. Markets around the world are enjoying rebound rallies and the largest shipping stock in the largest exporting country can’t get off the mat and manage even a 10% bounce off its lows. There’s a message here. And it’s very bearish."
As Chris Carolan suspected, zero activity in Asia's shipping rates late last year was indeed a bearish indicator: Four months later, on March 10 of this year, the NIKKEI slipped below that multi-decade October 2008 low.
Recently, Chris took another look at shipping rates -- this time, using the Baltic Dry Index (BDI). After falling more than 90% in 2008, the BDI has rebounded strongly this year. But before you see it as a bullish sign, consider what Chris told subscribers in his July 10 European Short Term Update (quote):
The Baltic Dry index measures shipping rates worldwide and is considered a reliable measure of economic activity. Bloomberg reported today that the Baltic Dry index fell by more than 1%, its largest decline this year ... [due to] a sharp drop in Chinese demand for ships to import iron ore and coal. It seems that China has been buying huge amounts of iron ore and coal, and now all their storage facilities are full, AND there are 60 ships waiting to be unloaded in Shanghai harbor with no place to put the stuff!
Reports that remark on the ineffectiveness of the stimulus efforts of the U.S. government are common these days. And yet we don’t see any reports on the effectiveness of "the Chinese stimulus." Not that we are claiming the Chinese have effectively stimulated the world economy, but we have to wonder to what extent their wholesale purchases of resources have distorted the Baltic Dry index and fooled economists and market participants into thinking things are better off than they truly are.
A bull might note that the Baltic Dry index rallied over 600% from its low. But that rally from the low is a three-wave move, suggesting a correction against a larger trend. Any additional weakness in the Baltic Dry will break the rising trendline channel of its recent rally. All in all, we see that there is much less to the spring rally in worldwide markets than meets the eye.