It’s been a tough start to the month for silver (SLV) with the metal giving up all of January’s advances and sitting near last month’s lows. One would think that this adverse price action might have spooked a few of the bulls, but speculative positioning in the metal would suggest otherwise. Rather than seeing some of the bulls pare back their exposure and lick their wounds, we’ve seen continued buying of silver contracts, with exposure to silver remaining near multi-year highs.
Unfortunately, for the bulls, this continues to be a headwind going forward. Therefore, until we can see some of the bulls throw in the towel, I believe that any rallies to the $18.45/oz to $19.00/oz region will provide selling opportunities.
The bulls seem to be quite hopeful that we’ve seen the lows in silver, evidenced by bullish sentiment remaining above the 50% level despite a nearly 20% correction since September. As we can see in the chart below, bullish sentiment for silver closed yesterday at 68% bulls, and we continue to have more bulls than bears despite silver being 10% off of its highs. This is a negative sign, as it’s rare for a sustainable new rally to begin without bullish sentiment capitulating below the 50% level. Therefore, while we may not need to make a new low in price below the $16.50/oz support level, it’s hard to argue there’s much upside either until we can get a shift in sentiment. Ideally, what the bulls want to see, is a drop below the 45% level on bullish sentiment. It would be even more bullish if this occurred despite silver holding above the $17.00/oz level.
(Source: Daily Sentiment Index Data, Author’s Chart, www.trade-futures.com)
(Source: Author’s Chart, CFTC Data)
If we move over to the chart above of small speculator positioning, there is no shortage in sight of buying among the small speculators. Currently, we are sitting at 67,900 contracts long, a 90,000-contract difference from the bottom in silver at 22,100 contracts short in May. While we do not need the small speculators to start shorting silver to put in a reliable bottom, we do need them to at least back off a little from their persistent buying each week. Despite the silver price being negative year-to-date on a return basis, and down 12% from its September highs, we have small speculators even more bullish. Generally, it is a negative sign to see people more excited to buy as prices fall. Reliable bottoms are built when prices are falling, and suddenly everyone is second-guessing their strategy about being bullish.
When it comes to small speculator positioning, the bulls are going to want to see the number of long contracts drop below 50,000 at a bare minimum to give confidence we could see a rally above $19.00/oz. While anything is possible and we could put in a 10% rally despite this elevated bullishness, I would argue the odds against this are very high.
So what’s an investor in silver to do?
Based on the fact that silver sentiment remains elevated across both speculative positioning and Daily Sentiment Index data, I see no reason to rush in and buy more silver here. The best time to buy is when others are throwing away silver miners or giving up on a trade, and the current sentiment picture suggests the bulls are more confident than ever. For this reason, I continue to watch the $16.80/oz to $17.00/oz level for silver to start to do some buying, and I believe any rallies towards the $19.00/oz area will be profit-taking opportunities. One would think that a nearly 6-month drawn-out correction of 15% in silver would have lulled some of the bulls to sleep, but it’s only emboldened them even more. Until we can get them to start to rethink their bullish positioning, I continue to view gold (GLD) as the more attractive trade with better reward to risk.
(Disclosure: I am long Gold (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.
The iShares Silver Trust (SLV) was trading at $16.44 per share on Tuesday afternoon, down $0.17 (-1.02%). Year-to-date, SLV has gained 2.81%, versus a 26.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Taylor Dart
Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups. Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year.