Shipping Stocks: Has the Trend Changed?

By Bruce Zaro | November 07, 2007 | 12:01 PM | 2 CommentsTweet This

One of the strongest groups we follow has been the shipping stocks. They have gotten beaten up enough lately that investors are asking themselves: has their run ended?

First, fundamentally we continue to see a generally firm market, albeit a two-sided one: the dry bulk shippers have been more than impressive as rates have been astonishingly strong all year, providing strong cash flows. Last week's hiccup in the Baltic Dry Index seems to us just a pause in the break neck increases over the past 3 months.  For the fuel tanker companies, however, the market is softer. Seasonally, this is the time of year that buyers line up their charters for the North American heating season, which should lead to higher charter rates. With generally warm weather in the U.S., however, charterers are talking a wait-and-see approach, to the frustration of owners.

On the supply side of the market, dry bulk supply remains remarkably tight while tankers are in mild oversupply. While markets are worried that newbuilds could swing the bulkers to over-supply in 2009-2010, this looks like an old story which gets re-hashed periodically. Eventually such markets do even out, but it looks to us like it will take at least 3 years before new supply should dramatically impact dry bulk pricing (a severe global recession could dampen prices in before then). The bullish case countering the new supply coming on line over that time is the scrapping of older, less efficient ships, ever-increasing demand from developing nations for the raw materials they need, the increasing distance of today's new shipping routes and the shortage of modernized global seaport infrastructure to handle the increasing trade. 

Technically, many of the stocks in the 60-odd member universe have been consolidating, which shouldn't be terribly surprising given their powerful first-half rallies.  But investors often give up too early on sectors in strong up trends. So how does one tell, technically, if a trend has run out of room? Two very important tools I use are trend lines and relative strength. For me they are indispensable in defining my sell strategy and minimizing the frustration of selling a strong stock far too early.

In the bulk shippers, DryShips, Inc. (DRYS) has been hot as a pistol - its 12 month low is $13 and 12 month high in $131.  In the chart below you can see its consolidation: reaching a top twice at $130, breaking a meaningful bottom at $120 and then following through with some additional breaks. Notice that DRYS experienced a similar consolidation earlier in the summer (shown here in the lower left hand corner of the graph). What sticks out to me is that the current consolidation is taking place near the medium point on its trading band - labeled "Med' on the graph's right side - just where I expect strong stocks to pause in an extended up-trend. Furthermore, the trend line is way down at the $45 level and the relative strength reading is nowhere near a reversal, although another double-bottom break near $102 would be another small warning sign.

Nordic American Tanker, meanwhile, (NAT) has been in a multi-year trading range which it has occasionally broken out of without any significant follow through (in both directions). I will say this about NAT, investors in it have been able to earn a nice dividend along the way, and at a current 13% it's still worth consideration. Today's move below $34 is technically a negative for NAT, but it has shown trend line violations in the past, only to reverse up and restore its positive trend.  Most important to watch as a sign of a true downward reversal: the relative strength is still on a buy signal but is close to a reversal down, perhaps indicative of the softer fundamentals facing tanker stocks today (as opposed to the strength in dry bulkers). That point and figure relative strength reading will be crucial in helping to determine if this is yet another false breakdown, or a downward break investors should take more seriously as sign things have changed for the worse.

I believe this group could very well complete its consolation soon and initiate another leg up, but there's no reason to be married to this assumption; I will be watching to see how technical conditions shape up.  More to come soon, I'm sure.

To learn more about how I run private client portfolios using technical analysis, contact our Managing Director of Private Client Services, Peter Holst: pholst@deltaga.com

 *Position disclosure: Long DRYS, NAT

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Economically sensitive As investors have seen recently, this group can be volatile and will certainly trade based on peoples' outlook for the economy.  Fears of recession drive these down, optimism about growth sees them rally. Interestingly, this group itself should be a canary in the coalmine, with its fundamentals perhaps acting as an early tell on what's next for the economy.  If so, sector fundamentals don't seem to be screaming "recession."   Submitted by Chip Hanlon on Wed, 2007/11/07 - 3:00pm » reply |

DRYS seems highly correlated to the market Over the past year, DRYS seems to be highly correlated to the swings in the market.  DRYS had a nice up leg from late Feb, 07 to early May, 07; gains were consolidated and then it moved higher in June and consolidated again in July; starting in Aug 07, DRYS really seem to take off just as the market was finding its legs moving 100% over the ensuing months. So my assumption would be that as the market goes so goes DRYS and the economy.  The market or at least the Dow and S&P500 seem to be voting a resounding "no" for higher prices.  Of note, divergences such as these between the NASDAQ and S&P500 generally lead to price failure.  So it would seem only a matter of time before the NASDAQ caves as well. Probably too early to call a top in the major indices.  I could argue that this is a reasonable short term opportunity; longer term would require lower prices and those prices need to be seen for greater than 5 days as occurred in Feb and Aug 2007 Submitted by Guy Lerner on Wed, 2007/11/07 - 4:31pm » reply |

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