Two Telling Charts - TRANQ and BDI

If you had to pick just two charts to look at in trying to gauge the future of the stock market, you'd be hard pressed to come up with any two much better than the transports without the rails (TRANQ) and the Baltic Dry Index (BDI).

The BDI is a measure of actual planned (not speculated) shipping of dry goods and the Nasdaq Transportation Index, almost devoid of the rails, is a measure of what Dow Theory wants it to measure - transportation of goods activity. Why do we want to exclude the rails? Because they have become so heavily levered to commodity transport and commodities have become so heavily levered to the U.S. dollar mess. The transport indexes with a lot of rails look better, but that's just because the poor finances of the U.S. are driving down the dollar and driving up investor demand for commodities - the unprintable money. So to get a more honest look at economic health, it would be good to look at transports with no rails. TRANQ has just one last I checked.

Looking first at this TRANQ: (click to enlarge charts)

Here we see what I regard as a ghastly chart. For one thing, it is down for the year. You could call that a loud Dow Theory non-confirmation of the S&P 500's lofty new high for the year. Another serious technical problem in this chart is the fairly well defined resistance level that was broken just briefly in September only to fade weakly back below it, breaking the 50 dma in the process.

Looking at the Baltic:

The BDI has been tracing out a pretty accurate roadmap for us so far over the last year giving us the forecast 3 months in advance. There's no guarantee it will continue to do this nice favor for us, but it does have a history of foreshadowing our stock market. It put in a top, a consolidation, and then a fairly meaningful decline about 3 months ago. So the two trusty charts, TRANQ and BDI, agree on the next phase of the market. It would appear to be a weak consolidation of several months at best or a smackdown to the economy of the TRANQ at worst.

Disclosures: SH, TWM

Comments

[TeamPlayers...:]

Great article

Oct 28 12:42 PM

[Econ 1:]

I agree TeamP---Nice piece-- It also sounds reasonable about leaning away from the rails for awhile until the dollar decides where it wants to go. I like quick and dirty and keeping an eye on the BDI gives you a birds eye view of the global economy. Was not aware of the three month leading indicator qaulity though but I will sure watch it for now--Thanks

Oct 28 04:47 PM

[doug churchill:]

Where is the list of components of the $TRANQ please?

Oct 29 06:09 AM

[G23ROCKS:]

Great article! These are nice tell tales to monitor.

Oct 29 12:35 PM

[Alan Young:]

I don't dispute the conclusion, but have a quarrel with the details.

This description of the BDI is inaccurate. BDI doesn't measure shipments, only COST of shipments, which is responsive to supply as well as demand. The supply of ships has been dramatically increasing this year, driving prices down, even when more commodities are being shipped.
Furthermore, BDI only covers shipments of commodities (dry bulk), not finished goods. If the cost of commodities is too distorted to include trains, why is it so informative when ships are used instead? This is illogical.

Oct 29 02:33 PM

[ramisle:]

I'd like to add to Alan Young's comment.
The BDI has had some greatly exaggerated movements this year, sometimes caused by port congestion. When ships are waiting for weeks at certain busy ports it decreases the availability of ships for hire, and affects the supply and demand, and therefore the rates. Sometimes the port delays are caused by weather, washed out rail lines, interruptions of port operations, but not always an indication of increased shipments. The ports, especially the coal port of Newcastle, Australia, and Qingdao in China for unloading Iron Ore, and their limitations have long been a major factor in fluctuations in the spot rate. Another factor is the stockpiling of ore preceding the annual iron ore price negotiations. In may, 2008 there was a tremendous spike in the BDI, greatly influenced by an effort by BHP to grab all available Capes to make the cost of VALE's ore from Brazil prohibitive. That was followed by the huge crash.
Really, the use of the BDI as an economic indicator is a false indicator if the many variables are not taken into consideration.

Nov 27 04:22 PM