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Baltic Dry is signalling new pullback in the stock market

GLOBAL trade volumes have dried up since the start of the financial crisis as Western demand for East Asian goods languished, depressing shipping activity as measured by the Baltic Dry Index.<br /><br />Although a well-known leading economic indicator, market strategists such as Societe Generale&rsquo;s Albert Edwards and Gluskin Sheff&rsquo;s David Rosenberg have recently been drawing their clients&rsquo; attention to the measure&rsquo;s relationship with both commodities and, more surprisingly, equities. <br /><br />The upward trend that we have seen in commodities since early 2009 is, according to Edwards, down to both the restocking of goods by manufacturing firms who ran down their inventories in the wake of the financial crisis and also the Chinese rebuilding their commodity stockpiles. <br /><br />Consequently, shipping activity rates increased from the bottom that they hit back in December as more goods needed to be transported. <br /><br />In terms of the relationship with equities, the Baltic Dry Index, has, generally speaking, also led the American S&amp;P 500 index by approximately one to three months. (See chart.) <br /><br />Given that the Baltic Dry Index topped out at 4,291 back in early June and has yet to show signs of a sustained upturn, the tipping point for the S&amp;P 500 &ndash; currently trading at just over the 1,000 mark &ndash; is about now, if the correlation is anything to go by &ndash; good news for the bears who believe that a decent-sized correction in the stock markets is ahead. <br /><br />And those who firmly believe that we are in a bull market should be even more worried by the six consecutive declines of the Baltic Dry &ndash; which sank 4.5 per cent last week &ndash; indicating that further drops in both commodities and equities are ahead. <br /><br />The weakness of commodities &ndash; reflected in both the Reuters Jefferies CRB commodities index and the Baltic Dry &ndash; has been seen by some analysts as evidence that the Chinese commodity re-stocking cycle is drawing to an end.<br /><br />Societe Generale&rsquo;s Albert Edwards warns in his research note that &ldquo;an end of the Chinese bubble of belief will have serious consequences for the global financial markets. For those who are looking for a trigger for a retrenchment in equity markets, we suggest watching the Reuters Jefferies CRB and Baltic Freight indices closely&rdquo;. <br />