Let me preface this discussion by stating that I am not a technical analyst and don’t pretend to be. In this post you won’t see any discussion of resistance and support levels, wave counts, bollinger bands, head and shoulder patterns or channels. However that doesn’t mean I don’t believe in paying attention to charts, especially one as interesting as that shown below:
For those that are unaware, the Baltic Dry Index (BDI) is a real-time, unadulterated ( i.e. not massaged in any way by government or other agencies) daily average price of what it costs to ship raw materials across the globe via 26 different shipping routes. Since it is real-time, it is one of the best economic indicators available and is a proxy for the global demand for commodities.
The chart above shows a significant divergence between the BDI and the S&P500 since the beginning of July this year. The BDI plunged in the wake of last years crisis, bottomed out in December and recovered strongly through June of this year. However since June the BDI has fallen approximately 45% signaling a drop off in global demand, whilst the stockmarket continues to factor in ever greener pastures. Furthermore, consider the chart of the BDI versus the price of copper shown below:
Same story, whilst the price of commodities has soared on the back of expectations of a strong global recovery, the BDI says otherwise. Have both stock markets and commodities gotten ahead of themselves? The BDI currently suggests that could the case. The stock market rally since March has been impressive (although volume has not been), however at some point stock market expectations will need to be matched by economic reality.
