BULL OR BEAR MARKET?
Aksel Kibar
10 April 2009
BALTIC DRY INDEX
The Baltic Dry Index (BDI) is a number issued daily by the London Baltic Exchange. The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis; the index covers Handymax, Panamax and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain." The index measures the demand for shipping capacity versus the supply of dry bulk carriers. Dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, such as concrete, electricity, steel and food. As a result the index is seen as an efficient economic indicator of future economic growth and production. On 20 May 2008 the index reached its record high level since its introduction in 1985, reaching 11,793 points.
The chart above is the historical price of the Baltic Dry Index between 1985 and 2009. ADIC's TECH TALK analyzed the BALTIC DRY INDEX in February and drew attention to the cyclical pattern at every base formation in the last decade. In August 1998, the index reached 780 levels. After a rebound, the second test of the lows was in January 1999, with 5 months difference. In December 2001, the index reached 780 levels. After a rebound, the second low was in July 2002, with 7 months difference. In August 2005, the index reached 2,350 levels. After a rebound the second test of the lows was in January 2006, with 5 months difference. In December 2008, the Baltic Dry Index reached 780 levels and rebounded from extreme lows. In February the TECH TALK said: "If the cyclical pattern is still intact, we can expect this consolidation to last for 7 months and to form another low (higher or lower) in July 2009, before the Baltic Dry Index reaches higher levels." In the last two months, the Baltic Dry Index reached the upper support/resistance zone at 2,350 and started declining towards its previous lows around 780 levels. We are watching the cyclical pattern to call for a bottom in the economic activity in the second half of 2009.
MSCI WORLD MARKETS INDEX
April 4, 2009 (Bloomberg) - U.S. Stocks rise, Giving S&P 500 First 4-Week Rally Since 2007. U.S. stocks climbed for a fourth week, the longest stretch since 2007, after the economy showed signs of improvement and world leaders agreed on measures to halt the recession. "The market is really starting to rise now," said David W. James, who helps manage about $2 billion. "This is probably going to be the strongest of the bear market rallies yet and has a good chance of being a spectacular one."
November 14, 2002 (Finacial News) - Fund managers quick to put cash to work. Fund managers worldwide are more optimistic about the state of global market and economies than they have been for a year and have been quick to transfer funds out of cash following recent rallies, according to a survey by Merill Lynch, the investment bank. Merill Lynch's stock market conditions indicator reached its highest level in a year.
The chart above analyzes the MSCI World Markets Index for the past one decade. In 2000, the index generated negative divergences at the top. In the last quarter of 2000, the long term moving averages crossed over on the downside and signaled a cyclical bear market. In 2002, the index generated positive divergences at the bottom. In the second half of 2003, the long term moving averages crossed over on the upside and signaled a cyclical bull market. In 2007, the index generated negative divergences at the top. In the beginning of 2008, the long term moving averages crossed over on the downside and signaled a cyclical bear market. In the second half of 2002, the MSCI World Markets index rebounded from the lows and tested the moving averages. The bear market rally was 18.3% from the lows of October 2002. At the peak of the bear market rally, the sentiment was positive. Today, the MSCI World Markets index is 20% higher than the lowest level seen in March 2009. The sentiment is positive. Is this the beginning of a new cyclical bull market? Not until we see the long term moving average crossover.
MSCI ARABIAN MARKETS vs. MSCI WORLD MARKETS
Created in MetaStock from Equis International
Random Walk or hidden order? Random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted. In short this is the idea that stocks take a random and unpredictable path. A follower of the random walk theory believes it's impossible to outperform the market without assuming additional risk. Critics of the theory, however, contend that stocks do maintain price trends over time- in other words, that it is possible to outperform the market by carefully selecting entry and exit points for equity investments.
Relative performance is a measure of price trend that indicates how a stock, index or commodity is performing relative to other stocks, indices and commodities in its group. It is calculated by dividing the price performance of a stock, index or commodity by the price performance of an appropriate stock, index or commodity for the same time period. The chart above shows the relative performance of the MSCI Arabian Markets versus the MSCI World Markets in the last 4 years. The cyclical behavior of the relative performance study shows anything other than random behavior. Underperforming periods were followed by outperforming periods and vice versa. Every cycle on the relative performance lasted 12 months. The study shows that, given all the volatility and the speculation about different regions economic and political conditions, long term charts followed an orderly cyclical pattern.
Aksel Kibar
Assistant Vice President/Portfolio Management
Abu Dhabi Investment Company
www.adic.ae
Disclaimer: Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. Any and all ideas, opinions, forecasts, market analysis or market data, expressed or implied herein, are for informational purposes only and should not be construed as trading recommendations to invest, trade, buy or sell securities and or speculate in any specific futures contract, option or any other market. Any investments, trades, and or speculations made in light of the ideas, opinions, and or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. The market data contained herein is believed to be reliable, but has not been independently verified. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such is subject to change without notice. In no event will ADIC or any of its employees be liable for any information contained herein. Data Source: Reuters, Investopedia.
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