The Baltic Dry Index is one of the few leading indicators we can use to judge market price action. The futures market can be used as a short term indicator to gauge stock market opening price, but does little to predict prices outside of a few days. The Baltic Dry Index on the other hand can give us a good picture of what is going to happen a few months out.

The Baltic Dry Index is basically a census on all the shippers in the Baltic. It queries the shippers for how many orders they have and at what prices they have agreed to ship raw materials. The reason this is a leading indicator is that it takes time for the ships to move orders and the materials must be delivered before businesses can use the materials and report profits. Therefore, the index precedes actually economic activity reports by a few months. The BDI is very accurate as it is free from speculation. Businesses are not going to place orders to shippers unless they have something to ship. If economic activity is up, the index will move accordingly.

What does the BDI tell us today. The Index stood well above 11,000 before the financial crisis hit. It quickly dropped below 1,000 a decline of 94% when the credit markets seized up. The Stock market proceeded to drop almost 50% from its all time highs around 14,000. The Baltic index rallied in November of 2008 and climbed from just under 700 points all the way back above 2,000. The stock market made its big moves starting in March of 2009. This was 3 months after the Baltic Dry Index made its strong moves up. The Index continued its strong performance and climbed all the way up to 4,000 points. The stock market has been on a tear the last 6 months and has also made a large recovery just crossing 10,000 for the first time in over a year.

The future. The Baltic Dry Index since crossing 4,200 has taken a hit and dropped below 2,200 at one point and now stands at 2,597. This is a drop of almost 50%. Therefore, in the next 3 months we should be seeing a drop in the stock market. A 50% drop from 10,000 would take it back down to 5,000. This may be a little extreme and we must admit it is too hard to predict a price level. Nevertheless, from past experience especially over the last 2 years the Baltic Dry Index has proved to be a strong prophet and in this current time would indicate a drop is about to come in the stock market.

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