Baltic Dry Index hitting multi-year lows… shippers, look out.

I’ve had DRYS under 70 as a “short the shippers” point in my trading notes for a while, since it tried to break 75 a few weeks ago, but horribly failed.  One last gasp of air before the ship sinks.

Here’s a chart that shows how DRYS, the sector leader, acts in relation to the BDI, Baltic Dry Index in London.  Its a complicated index that measures different size ships, but just take a step back and notice the correlation between the index and stocks like DryShips Inc. [[DRYS]] .  But first, what is the Baltic Dry Index, and why should you know about?

The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end user to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts.  The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk.

 

Keys and Correlations

Okay, look at the chart.  Here comes the death cross in September, as DRYS is about to fall below the BDI %-wise.    To me, that means fresh lows for all shipping stocks.  Notice what happened between May and June… do you know what happened there to cause that quasi-double top?  China cut production.  These shipping stocks were trading at too high premiums, banking on China’s growing economy.  Well, Olympics shut factories down, China’s growth numbers came lower than expected, and the Shanghai Index just jumped off a plane with no parachute.  Yes, there is a powerful correlation between foreign production, demand for commodities based on foreign countries, and the demand for ships to transfer these commodities.  But China’s demand wasn’t the only thing driving the BDI down… remember, there is a strong correlation between energy commodities, especially coal, and metals like steel when dealing with the BDI.  Therefore, from late July through August, as the commodities everywhere began to fall, so did the BDI.  Its VERY IMPORTANT to keep these associations in mind when trading dry-bulk-shipping stocks, any changes to these fundamentals will tell you how to trade the shippers.   

How to Profit From the BDI

First off, let me say that the BDI is at a critical level.  I expect shippers to get lower on the medium term.  But on the short term, I wouldn’t short the dry-shippers just yet.  Remember the “correlations”?  One of them was the price and demand for energy… hence, with oil moving up a little and trying to form a base above $100, I would wait for oil to get back below there before shorting.  I already posted DRYS at 70 as a spot to short dry bulks, DRYS now trades in the 40s, so I’m thinking the easy money shorting them is done and its important to know where to cover.  Well, right now, DRYS is trading about $2 away from its 52-low, so I would wait to see if DRYS bounces here.  If it does, then cover.  If not, then start shorting again while buying calls as a hedge to play the trend.

Another good way to profit from the BDI is to use it to find a reversal in energy stocks, especially COAL!  I believe that a bounce in the BDI is quite possible, and a very good trade on the long side (look how volatile the BDI is!) can be made on a relief rally on dry-bulk shippers and energy.  Therefore, when BDI rebounds, then get long coal via Patriot Coal Corporation [[pcx]] , International Coal Group, Inc. [[ico]] , James River Coal Company [[jrcc]] (Note:  JRCC just diluted their shares last night)

Above the Comments:

Shippers have been trending down, and now we have an idea why.  Long term, the shippers are done.  There will be a few relief rallies here and there, which can be day traded on the long side, but I will look to short at key resistances, while buying calls as a hedge on the dips.   DRYS used to be a favorite stock on the IBD100, and one of my favorite stocks to trade too.  I intend on milking these trades on both the long and short side.  In fact, I’m looking to get long a day trade as early as tomorrow.  I also have a feeling there will be at least one more relief rally that will squeeze these shippers higher, giving you an opportunity to get long for a swing trade, and a better entry point to short than now.  We’ll see.  Check them out:  [[drys]], Diana Shipping Inc. [[dsx]] , TBS International Limited [[tbsi]] , Excel Maritime Carriers Ltd [[exm]] , Eagle Bulk Shipping Inc. [[egle]] , Genco Shipping & Trading Limited Genco Shipping & Trading Limited [[gnk]] .

3-month chart for “short the ships”

1-year chart  …massive H&S patterns. 

Aloha!
-gio-  aka, “THT”

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