Last week here and on RealMoneyPro.com, I highlighted a Bloomberg article quoting noted market technician Tom DeMark’s bearish call on the China stock market. He expected the move lower to begin over the next several days and this has not been the case. In fact, the index is making new monthly highs, potentially the start of a second leg of the rally that took out multi-year triangle resistance.
In the RealMoneyPro article I suggested that a Baidu (BIDU) short was a way to play a potential turn in the China market. That trade was triggered on Friday by a break below small triangle resistance. A reader commented “I might be right about the China market, but the Baltic Dry Index was on fire the past month. That’s got to be all China.”
I didn’t make the China call, just reported it and outlined a potential trade around it, but the reader’s comment about the Baltic Index was dead on. The index has spiked up this month, along with a two week pop in spot copper prices, and both are normally considered second derivative plays on China. I believe there is a correlation between these moves and the strength in the China index, but a bit of caution is required.
The assumed close correlation between the Baltic Dry Index and the Shanghai Index is not apparent on the correlation coefficient indicator. Movement above the centerline reflects close correlation and below the centerline reflects degrees of negative correlation, and there have been periods of both relationships. A correlation is a good context for a trade but it is probably best to trade each individual chart.