Revisiting Baltic Dry Index’s Message

Back in March 2023, I wrote a Chart In Focus article about how the movements of the Baltic Dry Index (BDI) tend to show up again just over a month later as similar movements in the SP500.  Given the message from this model right now, it seems like an appropriate time to revisit this topic.

To review, the point of this comparison is to see how the BDI's movements are echoed later in stock prices.  To show that, I have shifted forward the plot of the BDI by 26 trading days in order to better align the structures in the two plots.  This draws us an imperfect roadmap for what the movements of prices will look like.

I noted in that March 2023 article that this relationship gets weird every once in a while.  There are inversions that come along, like the unforecasted dip at the left end of the chart above.  The relationship was inverted for all of 2019, and then got back into gear again in early 2020, only to invert again for a time in late 2020.  So it is not a relationship that deserves our complete trust.

The BDI peaked on May 10, 2023, which was 25 trading days ago.  That should mean that a top is due for the stock market right about now.  The BDI then fell hard to a June 2, 2023 low, and losing almost half its value in that decline.  The magnitudes of the BDI's movements do not get equaled by the stock market; that is not how this relationship works.  The proper message to take from what the BDI does is to note the direction of the trends and the timing of the turns, rather than trying to formulate an expectation of how much of a move you are entitled to.  And then you should also remember that inversions do happen, so one should not fully count on the veracity of the message. 

But when it fits with other insights, it can be a nice confirming message.  Seasonality analysis shows us that the stock market typically makes a dip in the second half of the month of June, and so starting a dip now as the BDI suggests would fit well with that.