In the current situation of financial markets, to the tune of the uncertainty created by the economic and fiscal government and central bank policies, have indicators or indices give us clues about the situation and the evolution of the real economy can help us clarify our particular view of the markets.
This task we can help the Baltic Dry Index (BDI) , this index measures the prices of goods international shipping. Basically to contemplate the transportation of raw materials, which form the basis for the transformation to intermediate or finished products (electricity, construction, steel, food, concrete goods …) is considered a leading indicator of the economy (future growth and production).
Unlike other indices or indicators, it is strongly linked to the real economy by the small speculative component, since sea freight only are hired by those who must carry a load and therefore is directly related to the supply and demand for such transportation .
The following graph shows the evolution of the BDI in the last 6 months:
The downward trend of this index over the past 17 days has raised some fears of a possible relapse of the economic crisis, when drilling annual low point as in the article by El Economista “Poor thing … The Baltic Dry Index recorded annual minimum “ , although it should be borne in mind that this index when he picks a direction often entails a certain inertia that delays the possible twists.
Initially a drop of 38% in 17 days did not bode well, however before drawing any conclusions is fundamental to compare their evolution with respect to other indicators and observe the correlation. To do this, we will be very useful InvestmentTools , a service that offers an extensive comparison of the BDI with other indices.
The comparison is most evident in the direct relationship they have is with the commodity index (CRB):
We note that at the endpoints market (maximum and minimum) the BDI has fulfilled its role fairly accurate leading indicator, albeit with much more volatility along the way.
A more classic and inevitable comparison with the SP500 we observe in the following graph:
Here it can be seen the inability to anticipate the market roof 2007, although other hit with the subsequent recovery thereof, the increased volatility does not give excessive reliability to predict the evolution of the SP500.
The logic in this behavior is motivated in part by the composition of the index itself, we can see in the following table, with the largest weight to technological (18.9%), financial (16.3%) and health services (11, 8%), prices more distant ocean freight sectors.
The search for indicators that help predict the market or be reminded of mismatches that occur are among the common tasks of every professional trader.
The above two examples with opposite results may help to understand the specificity of an indicator. For satisfactory results with any indicator in a particular market, it will be necessary to study the degree of previous correlation (in the short and long term) and be attentive to future changes and why they occur, which indicate whether you can continue to rely on its predictive power in that market.
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