The Baltic Dry Index (BDI) couldn’t be sending any clearer message for resource investors at the moment. It is screaming, as loud as it can, to buy mining stocks!
For once I am not talking about precious metal miners, but rather the producers of raw materials, with real industrial and commercial applications.
At Spreadbet Magazine, we’ve been tracking the BDI for most of the summer. In May, it was still in the doldrums after a shattering 18 months, which ground the share prices of most miners to dust. However, things suddenly started picking up in the middle of June and since then we have not looked back. For reasons we explain in the October issue of our Magazine, the BDI is prone to extreme spikes, thanks to the nature of the shipping industry.
Supply is relatively static, so any increase or decrease in demand has a pronounced effect on the reading. As of tonight, the BDI reads 2,125; well over double the figure at the start of summer:
Although the BDI is still well below the levels set in 2009 and 2010, as the global economy breathed a huge sigh of relief that the whole system hadn’t come crashing down around its ears, the latest spike looks significant. In the simplest terms, the BDI is telling us that shipping lanes are busier than they have been for nearly two years. Whether or not this leads to a sustained recovery remains to be seen, but consider this move in the context of what has happened to mining stocks over the last two years.
Below is the 5 year chart of Kazakhmys (KAZ);
Like most of its ilk, this stock been crushed. KAZ is trading just above its lows of 2008/09, when the world was heading to hell in a handcart. Sure, the run up in mining stocks over the following two years was a classic bubble, but so too has the correction been typically exaggerated.
What is interesting is to compare the progress of KAZ’s share price and the value of the BDI. Specifically note how a rise in the BDI has broadly been followed by a delayed rise in KAZ a few months later.
Repeat this exercise with other charts and a pattern should start to emerge.
If you think about it, this interpretation makes sense. An increase in demand of raw materials would be apparent far quicker in the prices paid for shipping than in the reported figures of a publicly listed mining company. Quotes for shipping are given in real time, while audited accounts take time to prepare.
Regular readers will know that we got KAZ wrong earlier in the summer. We made a big call and it didn’t work out. Well, life goes on and the market has no memory. Even though we are still nursing singed fingers from a few months ago, it would be foolish to ignore KAZ now.
Below is a 6 month view of KAZ:
There are several reasons this chart could be indicative of an imminent turnaround, but the stand out feature to me appears to be the daily RSI. Until today, the RSI has been at or below the oversold 30 mark. This sustained weakness in the stock suggests the selling has now exhausted itself, at least for the time being. The optimal time to have bought KAZ would have been earlier on Thursday, but the longer the BDI remains above 2,000 the better the trading conditions should be for all mining companies.
And as we all know, all ships rise with the tide. Perhaps now is the time to get on board.
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