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Wait for Pullback in Commodity Stocks

With the decline in the Baltic Dry Index, investors should wait for a sizable pullback in companies such as Mosaic and Cleveland Cliffs.

Economic indicators and forecasts are inherently flawed, because they are subjected to personal bias, upward and downward revisions and government interference. So when a leading economic indicator such as the Baltic Dry Index is forecasting a downturn, we'd better pay attention.

The Baltic Dry Index, published by the Baltic Exchange in London, measures the cost of moving major raw materials, including coal, iron ore and grain, by sea. Simply referred to as the BDI, the index covers Hnadymax, Panamax and Capesize dry bulk carriers over 26 shipping routes.

Simply put, the BDI is a leading indicator of economic growth, demonstrating a direct correlation between actually rates and the underlying demand from that related commodity.

Despite the recent rally across world markets, the BDI is now down for 21 days in a row; rates seemed to have peaked on March 10 at 2298. Currently, rates on the BDI as of April 13 are 1557, which equates to a peak-to-trough decline of 55% in three weeks' time.

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