It’s been a whirlwind week in the markets, and unfortunately for the silver (SLV) bulls, hiding out in the metal hasn’t provided much of a shelter. Despite the market’s 10% drop from its highs, the bulls fumbled the ball yet again at the $19.00/oz level for silver, and we’ve come crashing down since. This shouldn’t be surprising, as the silver bulls added to their bets yet again last week, and we are now sitting at 2-year highs for bullish contracts held by small speculators in silver. This is typically a headwind for the metal, and it leads to sharp rallies being sold into almost every time. Based on this, I see no reason to be in a rush to buy silver above $18.00/oz, and I believe that any rallies towards the $18.95 – $19.65/oz area will continue to be selling opportunities.
While I’ve noted over the past few weeks that optimism was getting quite frothy among the silver camp, we saw yet another jump last week, and we’re now sitting at levels of extreme complacency. Not only did bullish sentiment for silver finish last week at 88% bulls, but we also saw small speculators add to their bets in silver yet again. Beginning with sentiment data, we can see from the chart below that sentiment is now back in the exuberance zone, an area that has not been kind to silver in the past. In fact, when silver has headed into this area, it’s forward returns have been negative two months later on more than 80% of occasions over the past three years. Based on this, I would argue that it’s the wrong time to be aggressively buying silver or silver related stocks here.
(Source: Daily Sentiment Index Data, Author’s Chart)
If we move over to positioning among small speculators, we can see much of the same. As we can see in the chart below, the number of contracts held long by small speculators jumped by over 10,000 last week, finished the week at 77,000 plus contracts. This has pushed the 1-month moving average for long positions in silver among small speculators to near 70,000, the highest reading in over two years. The chart below suggests that the majority seem to believe in higher silver prices, and that’s generally the wrong time to be a buyer. Instead, I would prefer to see this indicator drop back to the 55,000 level or lower at a bare minimum before being interested in buying silver.
(Source: CTFC Data, Author’s Chart)
Fortunately, there is good news, and the impulsive rally in silver last week has increased the odds that the lows are in for silver at $16.60/oz. As we can see in the chart below, strong support for silver has moved up to $16.60/oz, and the key resistance level has moved up to $19.65/oz, from $18.45/oz previously. Therefore, the range has been revised slightly higher for the bulls. Based on this, I believe investors looking to add silver to their portfolios should look to the $16.60/oz – $17.20/oz region for new purchases. However, as long as the bulls remain out in full force convinced that higher prices are on the way, I see silver as a trading market, and selling is the right move if we approach the $19.00/oz level again.
I continue to remain bullish on silver long-term, as well as silver miners, but I see no reason to be a buyer at current levels. Until we can see some of the bulls throw in the towel or become impatient with this trade, I believe silver will have a challenging time getting through the $19.00/oz region. For me to get interested in silver, I would like to see sentiment dip below the 50% level or small speculator positioning drop beneath 55,000 contracts at a minimum. Until we see one of these two things occur, I do not plan to add any new positions in silver.
(Disclosure: I am long Silvercrest Metals (SILV))
The iShares Silver Trust (SLV) was trading at $16.55 per share on Thursday afternoon, down $0.13 (-0.78%). Year-to-date, SLV has gained 3.50%, versus a 15.99% 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.