A rally to over $2, as expected
Natural gas could run into selling for three reasons
Trading the range for the coming weeks
In late March, the price of natural gas fell to a quarter-of-a-century low of $1.519 per MMBtu. After a recovery that took the nearby futures contract to $2.162 in early May, selling returned to the market, and the price dropped to an even lower low at $1.432 per MMBtu by late June. I had been writing that the odds favored another recovery from the new twenty-five-year low as the cure for low prices in commodity markets is low prices.
Since trading to the June lows, natural gas has made an impressive comeback. The falling level of injections into inventory provided fundamental support to the energy commodity. At the same time, the diminishing number of operating rigs means that production is falling.
In July, news that Warren Buffett made a $10 billion investment in the natural gas industry with the purchase of Dominion Energy's (D) transmission and pipeline infrastructure likely made some speculators think twice about shorting the energy commodity at the lowest price in two and one-half decades. Natural gas came storming back last week, and rose above the early May high, reaching a peak of $2.284 per MMBtu on August 6.
The United States Natural Gas Fund (UNG) tracks the price of NYMEX futures. The BOIL and KOLD ETN products provide double leverage for short-term traders looking to participate in the volatile natural gas market without venturing into the futures arena.
A rally to Over $2 as Expected
When natural gas was trading below $1.80 per MMBtu, I had written that I expected a recovery to over the $2 per MMBtu level. The injections into inventory have been at low levels.
According to Baker Hughes, the number of rigs operating was 100 below last year, with 69 in operation as of August 7. Moreover, we are now in the final month of the summer season, and the futures market reflects fall prices. The 2020/2021 withdrawal season will start in November, and natural gas often rallies with the uncertainty of the winter on the horizon.
The daily chart of September futures shows that natural gas fell to a low of $1.583 on June 26. After a rally that fell short of the $2 level, the price reached a higher low of $1.646 on July 20. Last Monday, September futures rose above the July 7 high and moved through the $2 level as a hot knife goes through butter.
The price moved to a high of $2.284 on August 6. Price momentum and relative strength indicators were in overbought conditions. Daily historical volatility spiked higher to over 91% as the daily trading ranges expanded. Meanwhile, the total number of open long and short positions edged lower to the 1.289 million contract level at the end of last week. Speculative shorts likely exited risk positions during last week's rally.
On August 6, the price reached its latest high. Above last week's peak, the next technical resistance level stands at the early May high of $2.499 per MMBtu on the September futures contract. Natural gas settled at the $2.238 level on Friday, August 7, not far below the peak of the week.
Natural Gas Could Run Into Selling for Three Reasons
While I expected a move to over the $2 level, I cautioned that natural gas is not likely to run away on the upside at the beginning of August. The leading reason I expect another pullback is that the market has conditioned speculative shorts to sell the energy commodity on any rally over the past months. Selling at over $2 has been a profitable approach to the market in 2020.
The second reason for caution is that while stockpile injections have been small, at 3.274 trillion cubic feet, inventories are high for this time of the year. At the end of the injection season in 2019, stocks rose to a high of 3.732 trillion cubic feet, which set the bearish tone for 2020. Reaching that level by November would require an average of a 30.53 bcf injection into storage over the coming fifteen weeks. It is likely that stocks will rise to the four trillion cubic feet level for only the third time since the EIA reported inventories.
Finally, open interest has not increased with the price, which is often a warning sign for a futures market. The slight decline in the metric is a sign of short covering, but not of any substantial new longs coming to the market in early August.
The odds favor another move below the $2 level. Meanwhile, a higher low above the July 20 technical support level at $1.646 would be a constructive sign and a reason for a long position on a price dip with a tight stop below the higher low.
Trading the Range for the Coming Weeks
I expect natural gas to settle into a trading range over the coming weeks. The $1.70 to $2.20 level could become a comfort zone for the energy commodity. The upside action tends to come in October through December each year during the start of the peak season of demand during the winter months. Natural gas for delivery in January 2021 settled at $3.147 per MMBtu on August 7, which was above the November 2019 high at $2.905.
A short position with a tight stop could be the optimal approach to the September natural gas futures contract over the coming week. The odds favor another move to the downside after the most recent upside correction.Want More Great Investing Ideas? 9 "BUY THE DIP" Growth Stocks for 2020 How to Trade THIS Stock Bubble? 7 "Safe-Haven" Dividend Stocks for Turbulent Times
The United States Natural Gas Fund L.P. (UNG) was trading at $12.49 per share on Tuesday morning, up $0.18 (+1.46%). Year-to-date, UNG has declined -25.92%, versus a 5.72% rise in the benchmark S&P 500 index during the same period. UNG currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #72 of 111 ETFs in the Commodity ETFs category.
About the Author: Andrew Hecht
As of Monday's close, the 14-week moving average for silver's sentiment was sitting near 83% bulls, which tells us that there are 8.3 bulls for every bear in silver on a trailing-three-month basis.
Even more worrisome, we've seen nine readings above 90% bulls for silver in the past 15 days, and even a single day of 90% bullish sentiment is typically a red flag.
Given the extreme exuberance levels we've seen, I continue to see this as a terrible time to be chasing the metal, as it rarely pays to chase an asset when everyone else is piling. Let's take a closer look below:
As we can see from the first chart above, the silver/gold ratio has seen a near parabolic spike over the past month, and one of the most dramatic spikes in the past decade. While this certainly bodes well for silver long-term as it tends to perform better when it's leading gold, it's a red flag short-term.
The other issue is that the silver/gold ratio is now running straight into a multi-year resistance level dating back to 2016, and it's unlikely it's going to head through there with some difficulty.
Therefore, I would argue that at a gold/silver ratio of 65, silver's outperformance is likely getting a little ahead of itself.
(Source: Daily Sentiment Index Data, Author's Chart)
If we take a look at silver from a sentiment standpoint, we've been in the danger zone (red box) for over two weeks now, and any time silver has visited this zone, it has rarely ended well.
In fact, in the past three instances, silver corrected by over 15% over the following two months from the time that it entered the danger zone above 79% bulls. Assuming this were to play out similarly, we would expect silver to trade down to $22.60 before the end of September.
There's no reason to believe that the correction has to be this deep, but I would be quite surprised if we didn't head down to at least $24.50/oz by early October. Typically, when there are this many bulls in a trade, we need a significant correction to shake them out, so we're going to need at least a 17% correction from the $29.50/oz highs to begin to cool off sentiment.
Unfortunately, the other issue we have with silver is that it has charged higher in a parabolic fashion since June, with zero pauses along the way. This is an issue as parabolic rallies rarely unwind in a gradual fashion; instead, they correct violently as there are no support levels to catch them.
While this doesn't mean that we have to head back to the $22.00/oz level breakout on silver, it is certainly an outside possibility and a worst-case scenario. Therefore, while some investors might be tempted to buy this micro-dip to $28.50/oz, I would argue that it's probably not the best idea.
Ultimately, I would expect some more pain short-term before silver puts in a meaningful low.
So, what's the best course of action?
As noted last week, I had taken quite a bit of profit in my silver miners, and I continue to wait patiently for some fear to enter the market to repurchase my positions. At this time, we don't even have the slightest hint of fear, and we have the most overbought reading in years on silver, so I have zero interest in adding new positions here.
If we could see a pullback to the $25.00/oz level or a drastic shift in sentiment, I would consider adding some more exposure. For now, I believe investors would be wise to be patient and allow the correction to run its course.
Disclosure: I am long GLDDisclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Want More Great Investing Ideas? 9 "BUY THE DIP" Growth Stocks for 2020 How to Trade THIS Stock Bubble? 7 "Safe-Haven" Dividend Stocks for Turbulent Times
The iShares Silver Trust (SLV) fell $1.78 (-6.59%) in premarket trading Tuesday. Year-to-date, SLV has gained 50.30%, versus a 5.73% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #3 of 34 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
We've seen an exceptional start to the year for gold (GLD) with the metal up over 35% year-to-date, surpassing most asset classes for year-to-date performance briefly being thrown out with the March bathwater.This incredible run has seen the metal put in a new all-time high to finish the month of July, a very bullish development from a long-term standpoint.
However, while the stars are aligned for an eventual move towards $2,350/oz for gold as an initial target, we are beginning to see a couple of caution signs along the way, with bullish sentiment now at its highest readings it's seen in only five instances in the past twenty years.
Meanwhile, the daily chart is now beginning to get quite extended as well, printing the first caution bars in over six years for the metal. While this doesn't mean that one should rush out and sell their gold bars, it does suggest that not an ideal time to be buying. Let's take a closer look below:
As we can see in the chart above, gold broke out of a multi-year base last month and the follow-through from this breakout has been quite impressive.
Since the push above the previous high at $1,920/oz, the metal has climbed another 7% and has sliced through the psychological $2,000/oz level like butter. This bodes well for the gold market going forward, as the first technical target off of this breakout is $2,350/oz.
It's also a great sign as past resistance levels often become new support levels, and the previous resistance at $1,790/oz could now end up being the new floor for the market. Unfortunately, as noted above, things are beginning to get crowded, and any asset class rarely goes up in a straight line.
(Source: Daily Sentiment Index, Author's Chart)
As we can see from the chart above, bullish sentiment for gold has headed into the danger zone above 80% bulls and this has typically been a problem for the metal. Following all of these instances, the metal was down by 7% or more in the following three months from its highs, with most instances seeing corrections of 10% or more.
It's important to note that these pushes into this danger zone are leading indicators, and the metal often continues higher over the short-term. However, any upside that is captured while gold is inside these danger zones is typically retraced, and we've been in this danger zone since $1,970/oz.
Therefore, a pullback of 7% from the initial entry into this zone would target a correction down to $1,830/oz at a bare minimum before October. This time could be different, but this time rarely ends up being different in the market as markets are driven by emotions, and human nature never changes.
Meanwhile, from a technical standpoint, the daily chart of gold is now corroborating this view. As we can see above, the 280-day moving average for gold (green line) is quite a bit below price near $1,600/oz and gold has a tough time when it's 20% or more above this moving average. Meanwhile, the price action for gold with abnormal volatility is signaling caution bars as well (red bars), and this often tells us that we're seeing panic buying.
Generally, smart money does not panic buy, they buy in panic, and this tells us that retail is finally entering the trade here. While retail can make money temporarily, they often overstay their welcome and corrections ensue. Therefore, I believe that there's a good chance we might see a correction over the coming weeks, and I certainly would not be chasing the metal here.
So, what's the best course of action?
While I am in no rush to sell my position in gold that was bought below $1,450/oz, I am certainly not adding to my position here, and might look to lighten up if we head above $2,120/oz before fall.
This is because the trade is now beginning to get crowded, the metal is getting short-term overbought, and the miners are the most popular sector in the market, a bad sign short-term.
While the multi-year breakout points to higher prices over the long run, I am less inclined to believe we'll see the $2,350/oz target reached in a straight line, so I am being cautious here.
Based on this, I am holding a large position in Kirkland Lake Gold (KL), the most undervalued million-ounce gold producer, but otherwise am not looking to buy any miners at current levels. I've been bullish and adding to my position in gold and gold miners for several months now, but now that retail has arrived in full force, it's time to be open-minded to a pullback.
The bulls will remain in control and this bull market is nowhere near over, but for those looking to add exposure, a better opportunity will likely present itself over the coming months.
Disclosure: I am long GLD, KL
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.Want More Great Investing Ideas? 9 "BUY THE DIP" Growth Stocks for 2020 How to Trade THIS Stock Bubble? 7 "Safe-Haven" Dividend Stocks for Turbulent Times
The SPDR Gold Shares (GLD) was trading at $193.20 per share on Thursday morning, up $1.85 (+0.97%). Year-to-date, GLD has gained 35.20%, versus a 4.11% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 34 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
It's been an impressive start to Q1 for silver (SLV) as the metal has launched out of a multi-year base to new highs, catapulting over an area that's been tough resistance in the past.This multi-year breakout is an extremely bullish development long-term as it has improved silver's relative strength across all other assets, and it's also increased the probability that a move to $32.00/oz is on the table long-term. However, while the long-term picture has made significant strides over the past month, the short-term picture remains very over-heated.
This is because we have seen bullish sentiment hovering above 90% in silver for two weeks in a row, and we've got one of the most overbought conditions in silver in several years. This suggests while holding for higher prices is not a bad bet for long-term investors, adding exposure here above $24.50/oz is likely a bad idea. Let's take a closer look below:
(Source: Daily Sentiment Index Data, Author's Chart)
As we can see from the chart above of bullish sentiment, we remain in nose-bleed territory for silver as the long-term moving average is currently sitting well above 80% bulls. This has only happened on four occasions in the past decade, and every occasion was met by a 15% or larger correction within the next three months.
This does not imply that we must correct sharply to below $22.25/oz before the end of September from the recent highs at $26.00, but it does mean that the reward to risk is no longer favorable for entering new positions.
Typically, when we have this much bullish sentiment in a trade, it tells us that all the bulls are already in the trade, and it's difficult for an asset to go higher when the majority have already taken their positions. In fact, when everyone is locked into a trade, the market often goes lower as it almost always delivers the most pain to the most people possible.
If we look at the daily chart above, this view that things are a little frothy is corroborated by the most overbought condition we've seen in almost a decade for silver. As is shown above, we have not only printed multiple red caution bars, but we've also printed orange bars which are short-term sell signals.
Similar to the above sentiment readings, there is no guarantee that these signals will be correct, but they certainly do not bode well for short-term upside. In the past four instances following these signals, we have corrected at minimum 13% over the following three months, suggesting a trade down to $22.60/oz is in the cards before the end of September.
So, is there any good news for the bulls?
Fortunately for the bulls, the massive breakout trumps both of these indicators, and it suggests that while a pullback is possible, it will likely provide a buying opportunity. Generally, multi-year breakouts will find support at their breakout point if we do see weakness, and I would expect the $21.00/oz level to be a brick wall of support on any pullbacks.
Therefore, while I am long-term bullish on silver following this breakout, I believe the best time to enter the trade will be on a correction to shake out many of the weak hands, not here, while retail traders are climbing over themselves to buy every silver miner they can find.
Based on this view, I believe any 15% pullbacks in silver towards the $21.75/oz level will be buying opportunities for leading silver miners and silver, but I would not be in a rush to chase the trade here. For now, I continue to hold a few of what I believe to the best silver miners, but I've taken some profits off the table the past week to re-balance my positions.
Disclosure: I am long SILV, PAAS, GLGDF
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.Want More Great Investing Ideas? 9 “BUY THE DIP” Growth Stocks for 2020 How HIGH Can This Tech Bubble Fly? 7 “Safe-Haven” Dividend Stocks for Turbulent Times
The iShares Silver Trust (SLV) was trading at $22.71 per share on Tuesday morning, down $0.03 (-0.13%). Year-to-date, SLV has gained 36.15%, versus a 3.00% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 34 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
- The price action was bearish in July
- High stock levels and weaker demand were a bearish cocktail for the energy commodity, but natural gas was too low
- Back above $2, but the bears are likely to return
Source: CQGAs the daily chart highlights, natural gas has made higher lows and higher highs since late June. Meanwhile, a move above the July 7 peak at $1.989 was necessary to break the medium-term bearish trend. On the first trading session in August, September futures blew through that level like a hot knife goes through butter, trading to a high of $2.154 and settling at over $2.10 per MMBtu. Price momentum and relative strength indicators were moving towards overbought conditions. Daily historical volatility at the 99.6% level spiked higher on the dramatic move on August 3. The open interest metric has been flatlining on either side of the 1.3 million contract level. Even though the price action since late June has been constructive, the natural gas futures market remains in a bearish trading pattern since early May. A move above $2.162 is necessary to negate the bearish trend. The September futures stopped short of that level on August 3. In June and July, the nearby futures contracts dropped to lows of $1.423 and $1.605 per MMBtu. High stock levels and weaker demand were a bearish cocktail for the energy commodity, but natural gas was too low Both crude oil and natural gas have suffered under the evaporating weight of demand caused by the global coronavirus pandemic. Crude oil fell to an all-time low in April. Natural gas declined to its lowest price since 1995 in June.
Source: CQGThe monthly chart shows that the lows in June and July were the lowest natural gas prices during those months of this century. The last time the energy commodity fell to a lower level in June was in 1991, and in July since 1995. Stockpiles and demand destruction caused the price of natural gas to fall to the lowest level in decades over the past two months. However, at below $2, the price fell to a level that was too low as the peak season for demand starts in approximately four months. Back above $2, but the bears are likely to return The bearish tone in the natural gas market is likely to remain intact over the coming weeks and months, despite the August 3 rally. Stockpiles seemed destined to rise to over the four trillion cubic feet level for only the third time since the Energy Information Administration began reporting data. The first level of technical resistance stands at $2.162 on the continuous contract and $2.499 per MMBtu on September futures. With the winter season of 2020/2021 on the horizon, natural gas tends to move higher as the withdrawal season that begins in November approaches. However, any rally is likely to attract speculative selling because of the high level of inventories and the market's overall bearish tone. Over the coming months and into 2021, technical support stands at the recent $1.432 low. Below there, $1.335 and $1.25 per MMBtu are support levels from 1995. In 2020, crude oil fell to a new all-time low. In the natural gas futures arena, the $1.02 level, the bottom from 1992, stands as the line in the sand on the downside as it is the all-time low since natural gas began trading on the NYMEX futures exchange in 1990. The move on August 3 is a reminder for the bears that the risk of a short position increases the lower it falls. Want More Great Investing Ideas? 9 “BUY THE DIP” Growth Stocks for 2020 How HIGH Can This Tech Bubble Fly? 7 “Safe-Haven” Dividend Stocks for Turbulent Times
The United States Natural Gas Fund L.P. (UNG) fell $0.06 (-0.50%) in premarket trading Tuesday. Year-to-date, UNG has declined -29.00%, versus a 2.90% rise in the benchmark S&P 500 index during the same period. UNG currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #72 of 111 ETFs in the Commodity ETFs category.
About the Author: Andrew Hecht
- Natural gas consolidates moved higher after another small injection
- January spread reflects plenty of supplies
- Contango in natural gas is a function of seasonality
Last Thursday, the Energy Information Administration reported the fourth consecutive decline in injections into storage across the United States. The build of 37 billion cubic feet was a sign of falling production, and the natural gas futures market moved higher in the aftermath of the report.
Source: CQGAs the chart highlights, the August futures rallied to over $1.80 per MMBtu in the aftermath of the weekly inventory data. Technical support is now at $1.605 and $1.517, with resistance at $1.924 per MMBtu. Price momentum turned higher but was over a neutral reading at the end of last week. Relative strength moved above neutral territory. Open interest, the total number of open long and short positions in the futures market has been steady at 1.302 million contracts. The metric has been on either side of 1.3 million contracts since early June. Daily historical volatility at just over 49% fell from over 82% on July 9 as the daily trading ranges narrowed. The August-January spread reflects plenty of supplies
We are about to move into August, which puts the natural gas market one step closer to the 2020/2021 winter season. Natural gas tends to peak each year in January as the demand for heating reaches a high during the heart of winter.
Source: CQGThe chart of natural gas futures for delivery in January 2021 minus August 2020 shows that the January futures were trading at a premium of $1.099 per MMBtu at the end of last week. The premium of 60.8% reflects the high level of stockpiles that could reach four trillion cubic feet in November. At that level, there will be plenty of natural gas available to meet all requirements during the upcoming winter season. Contango in natural gas is a function of seasonality The contango, or premium for forward delivery in January 2021 versus August 2020, is because of seasonal factors. While nearby natural gas was trading around the $1.80 per MMBtu level at the end of last week, The January futures at nearly $2.90 per MMBtu make it expensive to positions on the long side for the upcoming winter season. With stockpiles at such a high level in July, I would not be a buyer of the January contract. However, on price dips, I continue to favor the nearby August or September futures from a risk-reward perspective. I would look for a 1:2 risk versus reward ratio on any long position. I believe that the nearby price will eventually move back to the $2 level or a bit higher, but the level of stocks will prevent natural gas from running away on the upside over the coming weeks and months. Want More Great Investing Ideas? 9 “BUY THE DIP” Growth Stocks for 2020 Newly REVISED 2020 Stock Market Outlook 7 “Safe-Haven” Dividend Stocks for Turbulent Times
The United States Natural Gas Fund L.P. (UNG) was trading at $10.56 per share on Tuesday morning, up $0.40 (+3.94%). Year-to-date, UNG has declined -37.37%, versus a 1.28% rise in the benchmark S&P 500 index during the same period. UNG currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #73 of 111 ETFs in the Commodity ETFs category.
About the Author: Andrew Hecht
While it was hard to find a $20.00/oz price target for silver during the metal's doldrums in March, we've now got $30/oz and $40/oz silver targets being slapped on the metal, with many analysts looking for these price objectives to be achieved by year-end. This should be worrisome to the bulls, as the metal rarely fares well when everyone is suddenly bullish.
Unfortunately for the bulls, this extreme optimism is coupled with the most overbought reading we've seen in nearly a decade, with silver moving up in a parabolic fashion, with the 6-month rate of change now over 30%. Based on the complacency we're seeing which is evidenced by panic buying, as well as an extreme overbought condition, investors would be wise to be cautious here.
(Source: Daily Sentiment Index Data, Author's Chart)
As we can see in the chart above of sentiment for silver, we've been on a reading of 85% to 94% bulls for nearly two weeks now, which suggests that there is a minimum of 9 bulls for every one bear in the market currently.
This has typically been a warning sign as the red shaded area shows and this is because when everyone is bullish, there's not many left to buy to support the rally.
The last time this occurred was August of 2019 and the metal-topped shortly thereafter before falling nearly 20% in less than three months. While we don't need to see a repeat of August 2019, we are certainly in nosebleed territory here which has typically been a good place to book at least some profits.
The one silver lining is that positioning among small speculators has not caught up to prior peaks before, and this is despite a much higher silver price ($24.00/oz vs. $19.00/oz).
While this remains a positive divergence, we are now outside of the moderate pessimism zone below 30,000 contracts. Also, this is typically a lagging indicator as it's only reported once a week, and therefore, it's not reflecting today's prices, but instead last Thursday's prices.
Therefore, while this divergence suggests we likely haven't put in a long-term top, there's no way to rule out a short-term top based on this indicator's reading.
(Source: CFTC Data, Author's Chart)
Finally, if we take a look at the technicals below, they are corroborating the complacency we're seeing in sentiment, as we now have one of the most overbought readings in silver we've seen in years.
This current overbought reading has now exceeded the overbought readings of July 2016 and August of 2019, and both of these marked major peaks. The difference this time around is that we have a multi-year breakout as a tailwind, and this is one reason why this won't likely be a long-term top.
However, multi-year breakout or not, nothing goes up in a straight line. Therefore, some volatility here would not be surprising, nor would a sharp correction to shake out some weak hands and relieve overbought conditions.
So, what's the best course of action?
While I generally don't like to fade breakouts, I have significantly reduced my holdings in a few silver miners yesterday as both the Silver Miners Index (SIL) and silver are hitting very extreme readings, and the odds have increased that we can see a 10-15% correction in silver from $24.50/oz. While this might not be a big deal to stomach for most investors in the metal, it could translate to a 20% drop in many silver miners that have also become very extended recently.
For this reason, I believe investors would be wise to take some profits if they are significantly overweight and look to redeploy that money once sentiment cools off a little.
Of course, there is no guarantee that correction occurs, but I would rather trade in probabilities than worry about rare anomalies. Generally, the time to buy is when no one is interested in the miners and silver, and the time to sell is when everyone is fighting to get in and bidding up the most speculative names. We've finally reached that juncture here, and this is why I've rung the register on some of my holdings.
Disclosure: I am long GLD
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.Want More Great Investing Ideas? 9 “BUY THE DIP” Growth Stocks for 2020 Newly REVISED 2020 Stock Market Outlook 7 “Safe-Haven” Dividend Stocks for Turbulent Times
The iShares Silver Trust (SLV) was trading at $22.20 per share on Tuesday morning, down $0.63 (-2.76%). Year-to-date, SLV has gained 33.09%, versus a 1.31% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 34 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
We've seen a surge in demand for silver miners over the past few weeks and the Silver Miners ETF (SIL) continues to climb the ranks, now the 7th best-performing ETF year-to-date. The rush into the sector has come as a result of silver (SLV) overtaking gold (GLD) as the best performing precious metal in 2020, and speculators are anxious to get their hands on miners that provide leverage to the metal.
However, while the recent advance has been a positive sign with many miners hitting new 52-week highs, the past two days we've seen panic buying in many silver miners as well as the metal, and this suggests that the trade is now beginning to get crowded. Based on this, I believe investors would be wise to take some profits in both silver and the silver miners, as the reward to risk is now the worst it's been in nearly a year.
As we can see in the above chart of the Silver Miners ETF, the index is trying to make a new multi-year high, and briefly traded above strong resistance at $45.00 this week. However, we will need a monthly close in July above $45.00 to confirm this breakout, and it's looking like this might be a difficult task for the bulls.
This is because the index has raced higher by more than 195% in less than 100 trading days, barely taking a rest along the way. In most cases, rallies of this size rarely hold onto their gains short-term, even if this is a positive change of character for the index. Therefore, while a breakout above $45.00 for July is possible, I remain skeptical that the bulls will be able to hold onto all of these gains.
If we take a look at a short-term chart below of the Silver Miners ETF, we can see that the index continues to have positive momentum, but the red bars shown above suggest that this momentum has gone a little too far. This is because the index is currently more than 25% above its 20-day moving average, a significant extension short-term that generally leads to correction over the following week.
This is further evidence that we've seen panic buying among the miners, and it's never a good idea to be a buyer when the crowd is also rushing to get into a trade. It's typically a good idea to do the opposite and begin taking some profits. While there's no guarantee that we need to pull back, I would not be surprised to see a 7-10% pullback in the Silver Miners ETF from the $47.00 level we hit yesterday.
Finally, if we take a look at the daily chart of silver, we've also got a big issue, and that's the fact that silver is now more overbought than it's been in nearly a decade. The current overbought condition (orange bar) exceeds that of the one we saw in August 2019 and August 2016, and both of these signals led to short-term and medium-term tops.
There's no reason to believe that this time has to be the same, though I would argue that there's a high probability that we will pull back over the coming week or two after hitting parabolic levels as of Wednesday's close. This corroborates the view that the Silver Miners ETF could be in for some volatility, yet another reason to think about booking some profits in silver miners.
While everyone is plowing into the silver miners trade and discussing $35/oz silver before year-end, we now have the most complacency we've seen in nearly a decade, as well as the most overbought condition in nearly a decade, and this rarely ends well for those chasing the metal.
Therefore, while the Silver Miners ETF has made significant progress and could register a multi-year breakout before year-end, I do not think this is the time to be adding new exposure to silver miners. Instead, I think it's time to go against the herd and start selling.
For now, I continue to remain long several silver miners like Pan American Silver (PAAS) and Silvercrest Metals (SILV), but I have taken quite a bit of profit this week in anticipation of a pullback. The time to be greedy is when others are fearful, and when the Robinhood traders are plowing into SLV at break-neck speed, it's time to be fearful and that this upside move might be about to run out of momentum.
Disclosure: I am long GLD, SILV, PAAS
The Global X Silver Miners ETF (SIL) was trading at $46.32 per share on Thursday morning, down $0.43 (-0.92%). Year-to-date, SIL has gained 40.15%, versus a 2.48% rise in the benchmark S&P 500 index during the same period. SIL currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #10 of 34 ETFs in the Precious Metals ETFs category.