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business newsBullish Signs From the Baltic Dry Index
The index, which is a key indicator of economic momentum, surged 6% yesterday.
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However, not all the action was bearish, as wise tape watchers would note that the Baltic Dry index surged 6% closing over 3,203. According to Gregory Lewis from Credit Suisse the rally was caused by a, “20% upward move in Cape rates driven by strength in the Atlantic basin.” Yesterday’s rally came after the index had been range bound for almost a month.
Were traders just piling in, looking for a breakout?
Not at all says Minyanville’s Lance Lewis, who explained in his nightly report that moves in the index do not occur because of “trading.” Lewis wrote, “When [BDI] jumps, it means real world demand for dry bulk ships has increased, and increased demand for ships means increased demand for the bulk commodities that they carry.” This real world demand Lewis is talking about comes from India, China and other parts of Asia via strong demand for iron ore and grain.
The strength in the BDI is just another sign that the world economy is picking up steam led by the brawn from emerged economies like China, India and Brazil.
Bull Pen: The purest play on strength in the BDI is the shipping stocks. While the charts don’t look great, the fundamentals may be signaling a turn in the core business. One to watch is Safe Bulkers (SB). The company is increasing earnings, has solid contract coverage through 2012, and has a strong free cash flow which it uses to pay a 7% dividend that is expected to increase. Some other names to watch in the sector include DryShips (DRYS), Diana Shipping (DSX) and Genco Shipping (GNK).
Bear Cave: Strength in the BDI is not a play on the U.S. economy; it is a play on the world economy. Yesterday the S&P 500 broke its 20 DMA—this is a bearish sign. For those looking to hedge their portfolio, shorting the S&P 500 ETF (SPY) could be a valid strategy. Use a buy stop at $119.50 to $121.50 depending on your pain tolerance.
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