Of Copper And Death Crosses: Chile ETF Gets Smoked

When it comes to Latin America ETFs, a familiar situation still exists. That being regardless of what the region's major bourses are doing, moving up, down or sideways, Brazil commands most of the headlines. At the ETF level, that means the iShares MSCI Brazil Capped Index Fund (NYSE:EWZ) is the Latin America fund investors, broadly speaking, are most familiar with.

EWZ has its own litany of well-documented woes, but it is far from being the only major Latin America that is being taken to task.

Another victim of declining commodities/rising interest rates/strong U.S. dollar trade is the iShares MSCI Chile Capped Investable Market Index Fund (NYSE:ECH). While the ETF has since modestly bounced back, it touched a new 52-week low at $53.77 earlier Tuesday. If ECH closes below $54.55 today, it will be the first time it has committed that offense since the fourth quarter of 2011. ECH has not notched consecutive closes in the low $50s since October 2011.

A big of the Chile ETF's problem is the country's status as the world's largest copper producer, which in turns gives one of Latin America's more advanced economies significant leverage to China's commodities demand, or lack thereof. That clearly has been bad news lately for ECH, although the ETF is not particularly heavy on materials stocks. In fact, utilities, financials and consumer staples all receive larger weights in ECH than do materials names.

Making ECH all the more vulnerable to further downside is the ETF's 17.3 percent allocation to financials, a group that includes Banco de Chile (NYSE:BCH) and CorpBanca (NYSE:BCA).

Combined, those stocks represent just 6.5 percent of the ETF's weight, but they are showing ominous signals. Banco de Chile recently committed the offense known as in the world of technical analysis. That is when a shorter term moving average, such as the 50-day moving average, crosses below a longer term moving average, such as the 200-day line.

As Trade With Pete noted, CorpBanca has committed the same offense. Then there is the bearish head and shoulders formation in Banco Santander Chile (NYSE:BSAC), 4.5 percent of ECH's weight.

ECH itself is close to a death cross. The Chile ETF is down 13.3 percent in the past month, a performance that is slightly worse than that of EWZ, the comparable Brazil ETF. Since May 1, investors have pulled nearly $30 million from ECH.

Picking a bottom in ECH could prove tricky given the ETF's volatile nature and track record of previous large declines in condensed periods of time. ECH is only modestly less volatile than EWZ with a three-year standard deviation of 24.9 percent compared to 26.5 percent for EWZ, according to iShares data.

Additionally, when ECH experiences multi-week declines, those are often followed by more declines. For example, the ETF plunged 23.5 percent over five weeks from July 1 to August 8, 2011. That was followed by a bounce then a 22 percent decline during September of that year. In fact, ECH's current tailspin is its third four to six-week double-digit decline since the fourth quarter of 2011.

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