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Why Diana Shipping Stock Popped 10% Today

What happened

Shares of dry bulk shipping company Diana Shipping (NYSE: DSX) surged more than 10% in early trading Tuesday before giving back some of their gains and closing the session up 5.9%.

Good news in the dry bulk industry appears to be the cause.

Crane operator loading a dry bulk cargo ship.

Image source: Getty Images.

So what

As Hellenic Shipping News reported yesterday, the dry bulk market has been going "from strength to strength" lately, with freight rates across the Atlantic in particular surging since mid-August. And in a follow-up piece this morning, Hellenic Shipping News noted that rates on Supramax and Handysize transport ships are "edging closer [to rates last seen in] the 2008 record year."

Furthermore, in a separate article, global shipping news outlet TradeWinds predicted over the weekend that the dry bulk market "should remain strong" throughout the balance of 2021 at least.

Now what

That being said, investors shouldn't take these predictions as gospel. Although it's true that rates for dry bulk shipping have been on a tear -- the Baltic Exchange Dry Index is in fact up three times since the beginning of the year -- the index has actually retreated from its high of 4,235 hit on Aug. 27, falling 10% through yesterday's close.

Investors should bear in mind that in cyclical industries like shipping, high prices tend to inspire shippers to add capacity to capitalize on the windfall profits, and this then acts to lower those profits as supply and demand come back into balance.

Diana Shipping's stock price may be rising in the face of this downturn for now, but it won't be able to defy gravity forever. If dry bulk shipping prices don't resume rising soon, you can expect Diana's share price to begin falling sooner rather than later.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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