Helping Self-Directed Investors Succeed Blog - Technical Divergence Among Groups of ETFS

Technical Divergence Among Groups of ETFS

November 10th, 2013

This week we wanted to shed light on an interesting technical divergence we are seeing among two distinct but related class of ETFS.

The S&P Metals & Mining Index - XME - was a strong under performer for most of this year. It started at about 46 in January and started sliding all the way down below 32 until June/July and in the last 4 months since the drop it has been steadily gaining ground to close at 40.37 this week. In the last 13 weeks this ETF has climbed over 9% and this week, especially, it registered a 4.75% gain.

Interestingly, the Powershares Multi-sector Commodity Trust Metals Fund - DBB - also started on a similar path at the start of the year at 19.50 and began a descent that brought its price down below 16 in late June/July. For few weeks in July/August, DBB bounched sharply higher moving somewhat lockstep with XME.

Beginning September though this convergence of price action appears to have ended. XME started marching higher while DBB resumed its slide to close at 16.42 not far from its lows below 16 in June/July.

This divergence is very interesting from a business perspective. Metal Producers are doing better than the Metals themselves. Producers stand to gain when they can produce more and sell at higher prices. Metal Prices, on the other hand, are governed by laws of supply and demand in the market place. Lower Metal Prices should have dragged the output price for producers also down resulting in lower profitability for producers. So, what changed?

If we bring in the US $ into the picture we see even more puzzling behavior. The US Dollar Bullish ETF - UUP - reached a high of nearly 23 in early July and started falling, right about the time when both XME and DBB were beginning to rise. This appears exactly what should happen. A weak US$ has the effect of rising commodity prices in the international market which should help metal producers. But, why did this not increase the price of the metals themselves as reflected in DBB.

In another twist, DBB dropped sharply in the last 2 weeks even while UUP bounced higher. This appears expected. But why did not the inverse play out between July and November when UUP was falling but DBB was not rising sufficiently enough.

This same divergence is playing out with DBA and MOO. MOO is diverging higher over DBA.

Does this signal a weaker demand for all commodities going forward or will DBB and DBA catch up with XME and MOO respectively at some point in the future? Or is it the structure of these commodity ETFs that's causing this puzzling price action?

Good Luck and Happy Trading!

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