Baltic Dry Index Forecasting a Market Pullback
The last three days were pause days that amounted to very little movement. The S&P 500 moved up just 5 points to the 1350 area and the DJIA moved up only 22 points. It is harder to get a bullish catalyst after moving up so far and so fast.We are still waiting to see what happens during a pullback on volume and how far the markets fall. The first S&P 500 support is the 10 SMA at 1333 and then the 20 SMA at about 1318. Strong bull markets usually hold the 10 SMA or the 20 SMA on a retracement and that is what we expect. There have been lots of put options purchased for protection with the low VIX. That should help support the markets on any selling momentum and it will minimize the damage. The next stop if they don't hold is near the 1305 to 1300 level.
At this point, unless Greece cannot get their agreement or something happens with Iran, the pullback is probably going to be limited to the 2 to 4% range initially.
However, the earnings have not been very good in terms of growth. In fact, if you pull out Apple's earnings in 2011 from the S&P 500, the growth was less than 3%. And the earnings growth slid from over 18% in Q3 2011 to under 6% in Q4 2011. The earnings growth is slowing despite many of the earnings beats this season. So even with the better "reported" employment numbers, the better manufacturing data, and improving consumer confidence, the earnings growth is ultimately what drives the markets. After this earnings season, the markets are potentially set up for a much bigger pullback (see bearish indicator watch below).
So far Apple Inc (AAPL) has served as a good "canary in the coal mine" for the markets and for the big money players. When AAPL starts pulling back, the markets will probably follow along with it.
Bearish Indicator Watch:
MR has previously detailed numerous leading indicators and metrics that
we watch every week to help forecast future moves. But one we didn't
talk about recently is called the Baltic Dry Index. This is a number
issued by London that tracks worldwide international shipping prices of
various dry bulk cargos.
The index provides a measure of price for
moving dry raw materials by sea - coal, iron ore, grain, etc. Just
recently, as shown below, it hit a 25 year low. In January of this year,
it had its worst decline since it began recording prices back in 1985.
The fast and steep drop from mid October 2011 till now is astounding.
As an example, the large freighters have been forced to charge less than half of the price they did just 6 weeks ago. The situation is so bad that the rates have fallen over 60% in the last 2 months and they are now below operating costs in some cases.
This Baltic Dry Index has been a solid forecasting indicator for predicting slowing economies and even for recessions. For example, it fell sharply in early 2008 and we all know what happened the rest of that year. Now MR is not predicting a repeat of 2008 by any means.
But
this indicator certainly is suggesting that Europe and the world
economies may be slowing down faster than many people are currently
factoring into the stock markets. While this index is falling like a
rock, the markets are in a steep climb. This divergence probably means
that falling earnings growth and a European recession could ripple
through to cause a much bigger market pullback (6%+) in the second or
third quarters. This index is worth watching.
There will be no power picks tonight based on the unsigned Greece agreement and the extended market. We will reassess recommendations this weekend based on the next few day's market action.
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Good luck in your trading and investing,
CEO Jalexa Trading Consultants, LLC
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