It’s been a frustrating few months for investors in the silver space (SLV), with the metal underperforming the S&P-500 (SPY) by more than 20% since September alone. This significant underperformance shouldn’t be all that surprising, as an asset class tends to perform terribly when everyone is raising price targets to 25% above current levels (as we saw in late August). Fortunately, it looks like the worst of this correction is over, and we’re finally beginning to see sentiment among market participants become a little more impatient. The drop from 95% bulls to 50% bulls in silver is evidence of this sea change, as is the moderate decline in bullish small speculator positioning last week. While I still do not see any signs of capitulation or disgust for silver, these dents in optimism continue to be a step in the right direction. Let’s take a closer look:
As the chart I’ve built below with the silver price (grey) and small speculator positioning (blue bars) shows, small speculator positioning dropped by over 10,000 contracts last week, from over 52,000 contracts to just over 40,000 contracts. This is a decent improvement a pretty reasonable one week drop, and this shows that some speculators are beginning to tire of this trade or pare back their bullish bets. While this reading on speculative positioning isn’t by any means near levels of fear like we saw in May through June, it is a decent improvement from the frothy positioning we saw in early August through September, with two jumps to nearly 65,000 contracts. I would prefer to see speculative positioning drop below 30,000 contracts to suggest some pessimism, but this recent drop is an improvement, albeit a small one.
(Source: Author’s Chart)
If we take a look to see if bullish sentiment is confirming this below, we are seeing similar readings currently. Bullish sentiment on silver, based on Daily Sentiment Index Data (DSI) is sitting 50%, and more than 45% below its peak at 95% bulls in early September. Similar to the CFTC speculator’s positioning, this reading is nowhere near capitulation or fear, but it is suggesting disinterest, which is an improvement. For this indicator, I would ideally like to see a drop below 40% bulls to give me confidence that new highs on silver above $21.00/oz are possible within the next year. Unless this happens, I believe silver might run into problems near the $19.00/oz level on any rallies.
(Source: Daily Sentiment Index Data, Author’s Chart)
Finally, if we look at the technicals, this disinterest in silver and cooled off sentiment has come at the expense of very minimal damage to the technical picture. As we can see below, silver continued to remain above its 20-month moving average (teal line), and a pullback to this area after reclaiming it would be entirely normal. Therefore, investors in silver are going to want to watch the $16.00/oz where the 20-month moving average sits, as this is a pivotal level where we want to see the bulls play defense. A monthly close below $16.00/oz would be a bearish development.
While we’ve yet to see any real fear in the silver trade as we have with gold (GLD), the continued shedding of bullish positions is a positive sign, and at least suggests that a bottom is possible near current levels. The best-case scenario for investors that want to start positions would be a final smackdown below the $16.40/oz level or lower, but there’s no guarantee we’ll get this. Based on the fact that sentiment is more sour on gold than it is on silver, I continue to view gold as the more attractive trade. However, a drop below $16.40/oz on silver would be me interested in a starter position in the metal as this would provide a low-risk entry.
The iShares Silver Trust (SLV) was trading at $15.93 per share on Thursday afternoon, up $0.03 (+0.19%). Year-to-date, SLV has declined -0.38%, versus a 20.63% 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.