Saturday, May 14, 2011

ZSL Fail

The other day I was going to rant about the security ZSL that is a double short silver ETF.  The rant died because Blogger was not available for inputs (you could read my page but I couldn’t post anything on my end due to their maintenance work).  Thus, the energy to rant faded.  But, the moral is still there so I will discuss it. 

I made a lot of money this year playing the rise in silver using several ETFs, especially PSLV and AGQ.  I was feeling good too since it had been a while that I had a run of such good luck in the markets.  I sold out and went to cash at the top and watched the carnage in silver as it dropped the week of May 2nd.  See the SLV chart.

I often use Elliot Wave ideas to plan my moves.  So, I figured the move down had to be done in three or five waves. Thinking that there should be a dead cat bounce I traded the first bounce up in May with success.  Then I went short thinking that there was more downside in silver.  That’s where I fell into a bear trap.

I bought ZSL, a double short silver ETF, on May 12.  It popped up early and I waited for that first nice v shaped dip, and bought it.  It then bounced a little and then dropped like a rock.  I was down 10 % in a few heart beats and was stopped out.   At that time I also noted that Yahoo Finance data was wacky.  ZSL and AGQ (the double long silver) were down at the same time.  WTF was this?  That relationship was clearly shown on charts that day but now you see that Yahoo shows it a little different. The May 13th chart shows it again briefly in the 12 pm hour.  Also, note that AGQ ends the week down about 18% and ZSL is flat instead of being up 18%. (That's the ZSL bear trap I got into).  Why would they be that far apart?

Both ZSL and AGQ are advertised as being the mirror images of each other. One is double short the silver index, the other is double long.  A close look at the weekly comparison shows that they don’t really mirror one another all that well.  ZSL has more quirkiness about it, often being 5 or 6 % out of sync from the other funds that are tied to the ‘same’ index.
And that is the moral.  Index ETFs are just as likely to be autonomous securities; they don’t always do what they are supposed to do.  It is well known that they have price slippage and don’t track the indexes as closely as one would ‘expect’.  More importantly, they can become wild cards, trading independent of their stated purpose.   I suspect this last week ZSL was a rogue fund for the days May 11 through the 13th.  It traded tens of millions of shares a day when AGQ was four or five times less.

I suspect that the great conspiracy theory about banks controlling the silver markets could be brought into this discussion.  For what ever reason, it sure seemed as if someone didn’t want silver to get below 33.30/oz.  Or, was this just an opportunity to unload large short positions?

All I know is that a little guy like me got played.  If pushing silver prices up will hurt the big banks I’m all for it.

Update: Here is a discussion of ETF manipulation for AGQ/ZSL on May 13th

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