After a thrilling two-week rally in the stock market during early September, shippers began to fall. They had been enjoying a nice rally on the general premise of economic recovery, market stabilization, and rising materials prices. But suddenly on September 17th, the shipper sector broke, and leading names fell - plummeted, actually, at a much faster rate than the modest pullback in the general market would have implied.
With shippers today generally on the rise again, it is worthwhile to look at the reasons for the mid September breakdown. What was the number one reason? I would have to say it was the Baltic Index, which quantifies the prices shippers get for new contracts. It had stabilized at near 2400 in early September, and then began a robust rise, only to suddenly stop short. It began falling, slowly at first, then accelerating. By the 17th it was clear that the BDI was tanking, and the shippers as a group followed. The timing of the movements of BDI seemed to be the key. A market advance which coincides with a BDI advance is a powerful motivator for the depressed shipping stocks. The "robust rise" of early September triggered the sector advance. Few sectors snowball as readily as the shippers. Within days, shippers were moving to recent highs, but the BDI reversal stopped the process entirely.
Of course, the negative press didn't help either. The blogs were heavily negative on the shippers, pointing to the newly delivered ships and declaring that we need fewer ships, not more, in current economic conditions. Finally, Navios (NYSE:NM) picked that moment to float a new stock offering, diluting their stockholders. The market knows that new offerings are one of the traditional signs of an overbought stock - in a sense, it is the ultimate in "insider selling".
How does today's rising shipper sector compare to September 17th? Well, the BDI is finally responding positively this time, passing 2800, rising 5 days in a row, and rising even faster than in early September. The chart also shows an even more key fact - the BDI is not only rising but is above its 200-day moving average; in mid-September at the time of the shipper retreat the BDI was well below its 200-day ma. No doubt, there is a lot of money on the sidelines which won't come back into the market until we have a rising BDI above its 200dma. That alone can explain a lot of the listless behavior of the shipper stocks in the past few months, but clearly the situation is different today. Sentiment is higher, with positive blog stories and upgrades. The sector is riding a more optimistic wave, and any key event could set off an upside stampede - a large earnings beat, a raised or reinstated dividend, or an acquisition.
The four stocks I am highlighting here are the key names I am watching. Today, Diana Shipping (NYSE:DSX) became the first of the shippers to pull strongly above its Sept. 17 high. It was followed within minutes by Eagle Bulk Shipping (NASDAQ:EGLE). I note with some satisfaction that DryShips (NASDAQ:DRYS) is not a leader here - "satisfaction" because market karma dictates that those names issuing the most new stock should not be the first to benefit from a sector recovery, and indeed, that may be the case, DRYS being held back along with FreeSeas (NASDAQ:FREE), Navios Maritime Holdings (NM), and others who resorted to dilution as a remedy.
TBS International (NASDAQ:TBSI) has an interesting chart. See how the "stick" part of the candlesticks are long at the tops during the mid-Sept peak? This can be visualized as a price region in which there was heavy selling or shorting, each day forcing the price down after initial gains. The zone from 9.50 to about 9.85 represents a region which, once traversed, can lead to increased short-covering. TBSI has a short ratio of over 3.5, and the fuel which is the short positions could potentially power the stock higher very quickly - perhaps another dollar in just a couple of days. Given continued BDI strength, I feel we could see TBSI at $11 by early next week. The options are cheap, too.
Paragon Shipping (NASDAQ:PRGN) is one of the best "sleeper" plays in the shipper segment. As the leaders pull higher, we can expect to see this tiny but well run company move up in price quickly and quietly. Yes, they are still paying a dividend.
If you want to participate in the shipper rally, take your eyes off DRYS, and start watching the new leaders. Good luck!
Disclosure: I am long TBSI, GNK, EGLE, PRGN, and ESEA.