Why you shouldn't be afraid of dry bulk shipping industry pullback

Why you shouldn't be afraid of dry bulk shipping industry pullback (Part 1 of 6)

Dry bulk shipping stocks have risen a lot, now what?

Dry bulk shipping companies have soared ahead

At the end of August, the U.S. market started to sell off because of tapering woes and the possibility that a Syria strike would drive oil prices up and negatively affect global economic growth. As a result, dry bulk shipping companies fell as well, despite higher rates. When that fall came to an end at the beginning of last week, the U.S. market rose. But dry bulk shipping stocks soared on the back of higher rates, which we mentioned in last week’s dry bulk update, Dry bulk shippers in second stage recovery.

Dry Bulk Shipping Stock Performance 2013-09-10Enlarge Graph

Main drivers of share prices

With several companies rising more than 10% last week, after rallying significantly in the second half of August, new investors can expect increased risk due to short-term fluctuations in the market. There are three main drivers that affect companies’ share prices: expected earnings, actual earnings, and market sentiment and dynamics. The expectation of higher earnings—driven by the late increase in shipping rates—has been pushing share prices higher recently, as iron ore shipments from Australia and Brazil are on the rise.

Market sentiment and dynamics

As share prices have rallied this much, there are bound to be people who would start selling to lock in profits. These include traders, retail investors and traders, and algorithmic fund managers who use technical signals to buy and sell. When the broad market falls, fearful investors will also look to exit. Speculation that prices have risen so much that shares will have a short-term pullback—so that a trader decides to sell now and buy in later—is another factor that could push prices down. I call this “market dynamics.” Think of these market behaviors as small hills or mountains that companies have to climb over.

Essentially, this relates to position management. Questions like should you buy now?, should you wait for a pullback?, should you sell now?, should you buy a little or a lot?, should you sell now and purchase later at a cheaper price?, or should you completely sell and run? must be circling around investors’ heads right now. The reality is, there are many ways of positioning yourself and investing in the market. But investors have to find positions they’re comfortable with. What works for some may not work for others.

Long-term trend is still up and improving

Nonetheless, the long-term trend of dry bulk shipping companies is still improving (continue to the next page to explore these trends). With higher grain shipments expected later this year, shipments of iron ore and coal from Australia and Brazil to increase further, and September to November’s tendency to be a strong period for dry bulk shipping companies, dry bulk shipping companies could find support. Today’s news release that China’s industrial production grew at its fastest pace in a while is encouraging. An update will be released at the end of the week for detailed analysis and explanation. So while we could see some short-term headwinds due to market sentiment and dynamics, investors shouldn’t be scared. If prices do fall, new investors should take that as a positive sign as long as the fundamentals are still improving.

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