The Baltic Dry Index: Why You Should Use It and How to Do So (+3K Views)

The Baltic Dry Index is, in my opinion, the best leading economic indicator to follow when the media is telling us the economy is looking great one week and then predicting a double dip recession the next. Let me explain.

So says an article* at  www.pinnacledigest.com which Lorimer Wilson, editor of munKNEE.com , has reformatted into further edited […] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) The article goes on to say:

The Baltic Dry Index, also known as BDI, also known as Dry Bulk Shipping, is an index of shipping and trade that measures the international shipping prices of different dry cargoes such as rice, corn, iron, oil etc. Basically, it is an indication of shipping demand against the available worldwide fleet of dry bulk ships. The steelmaking raw material constitutes the largest source of demand for dry-bulk shipping.

One thing to note is the BDI only tracks the shipment of unfinished goods. This is very important to remember and explains why this index precedes market moves and economic moves. Raw goods are used to manufacture finished goods i.e cars, buildings, planes, you name it. If the world is building more planes, cars and buildings, for example, then employment is likely increasing. This is great for the economy and provides liquidity for the stock market via increased retirement investing, pensions, and personal investing (notice I say liquidity and not necessarily rising stock prices… I’ll get to that later).

When the Baltic Dry Index is on the rise, economic activity is either increasing or about to increase. As such, when its rising, it precedes increased liquidity in equities, rising commodity prices, rising interest rates and rising commodity based currencies such as the Canadian dollar.

A key note to remember in all of this is that the BDI is a leading indicator of economic activity but not necessarily a leading indicator of a rising stock market… just a more liquid stock market, due to better economic conditions. So what does that mean? It means don’t buy stocks just because the BDI is rising. In fact, my strategy is quite the opposite. I like to buy stocks in quiet or slow periods and sell into exciting more liquid times.

If I’m to use the BDI as my sole tool of judging the market (always have more than one indicator), I’m in a hold period, but still looking to buy on weakness.

*http://www.pinnacledigest.com/articles/best-market-timer%3A-baltic-dry-index