It’s been a boring few months for investors in the silver (SLV) space as the metal continues to consolidate in a six-month trading range following its September top. While we initially saw a strong reversal in continued optimism among the bulls. In fact, we’ve had so much optimism that positioning among small speculators for silver has now hit a new 2-year high despite silver being more than 10% below its prior highs. This overly bullish positioning continues to be a headwind for the metal short-term, and should put a lid on any further rallies. Based on this, I would view any rallies above $19.00/oz in Q1 as selling opportunities.
While silver has continued to consolidate the past several months, which would typically erode the majority of bullish sentiment, we’ve instead seen small speculators adding to their positions in silver at break-neck speed. In September of last year, I warned that silver was getting ahead of itself above $19.50/oz based on the 1-month average of small speculator positioning heading above 55,000 contracts. Currently, that figure sits at 67,000, more than 20% above the levels which brought on the September top, and at a new 2-year high. This suggests that the long silver trade is beginning to get crowded, and this typically is a headwind short-term.
(Source: Author’s Chart, CFTC Data)
As we can see in the chart above, small speculators have been heavily bullish silver since May. Still, it’s not until we see their positioning increase above the 55,000 contract level on a 1-month trailing basis that it becomes a concern. If we look above, we can see that small speculator positioning above 55,000 contracts brought the Q3 rally in silver to a screeching halt, and currently, we’re on our fifth consecutive week above this level as of Friday’s close. Therefore, while further upside short-term is certainly possible, as it was in early September, it is less likely that further upside will be sustainable.
(Source: Author’s Chart, CFTC Data)
As the chart above shows with a red line separating moderate bullish sentiment and more alarming levels of bullish sentiment, small speculators are beginning to get a little too optimistic here. Not only has this indicator continued to trend higher above this line, but it also continues to make new highs. Ideally, investors are going to want to see small speculators begin to pare back their bullish positioning, as it’s rare that a breakout through a key resistance level will be successful when the trade is already beginning to get crowded. Given that silver looks like it wants to make another run at $18.45/oz resistance, this crowded positioning is a bit of an issue.
If we look at the chart above of silver, we can see that the bulls remain in control, but $18.45/oz continues to be a brick wall of resistance. Given that small speculators are unwaveringly bullish here, and more bullish on prices than the September high, I do not see this as an opportune time to be starting new positions. In addition, I believe there’s a high probability that silver will run into trouble at the $19.00/oz level if we head there before the end of Q1.
While silver’s long-term chart continues to improve with the long-term moving averages curling higher, the persistent buying by small speculators suggests a low likelihood of new highs above $20.00/oz over the next couple months. If we were to see a push towards new highs with the small speculators as bullish as they are, I believe this would provide a selling opportunity. Therefore, while I remain long a couple of silver miners, I have zero interest in doing new buying here. The time will come to buy silver and silver miners, but I do not believe this 3% gap up today to $18.30/oz is the time to be doing so.
(Disclosure: I am long Silvercrest Metals (SILV))
The iShares Silver Trust (SLV) was trading at $16.94 per share on Tuesday afternoon, up $0.38 (+2.29%). Year-to-date, SLV has gained 5.94%, versus a 26.71% 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.