The Silver Miners ETF is 45% in three months from its May low.
Bullish sentiment continues to creep higher for silver, and we will likely move onto a sell signal from a sentiment standpoint early next week if this continues.
I believe the silver miners are a very crowded trade short-term, and I believe this is an opportune time to book some profits.
Just a couple of weeks ago I discussed that sentiment in silver (SLV) was beginning to get over-heated, and the 6% rally over the past week has pushed sentiment to even more optimistic levels. Not surprisingly, this has been a boon for the Silver Miners ETF (SIL), which has launched itself right up against two-year resistance levels at $31.35. The catalyst for this move higher in silver is a catch-up trade to gold which has been the leading metal since the Q4 2015 lows. In addition to a depressed silver/gold ratio, renewed optimism regarding inflation fueled by dovish Fed talk is placing a steady bid under both metals. The Fed’s target inflation rate of 2% is well above the current 1.5% five-year forward inflation rate. Without rate cuts and or stimulus, there is no hope to achieve this. While the catch-up trade for silver and the Fed’s sudden dovishness are certainly still in play long-term, short-term, we are bordering on exuberance as we approach $31.50 on the Silver Miners ETF. Based on this, I believe this is an opportune time to book some profits in both the ETF and individual silver miners.
As an anecdotal example of current sentiment below, the above comments are what we saw on a Pan American Silver (PAAS) article yesterday. Pan American Silver is currently trading at $18.00, but the consensus is that investors should wait for $80.00 or higher to sell any shares or a 200% rally in silver. This is extreme herd mentality and typically occurs near short-term tops. If I was long the S&P-500 (SPY) and the consensus was that I shouldn’t sell until the S&P-500 went up another 200% to 8500, I would be just as worried and begin taking profits immediately. Let’s take a look at a more objective tool for measuring sentiment which is Daily Sentiment Index Data, and see if it’s confirming the same sentiment we see on message boards. Looking at the below chart, it is proving what we see from an anecdotal standpoint. Bullish sentiment for silver closed yesterday at 93%, and the long-term sentiment moving average is about to creep into the extreme optimism zone. Bullish sentiment of this magnitude typically leads short-term tops by 1-2 weeks, and I would expect any further upside in silver to be retraced if we do head over $18.70/oz.
(Source: Daily Sentiment Index Data, www.trade-futures.com)
So how does this affect the Silver Miners ETF and individual silver miners?
As those who trade the precious metals markets might know, the miners tend to lead the metal, and this makes for frustrating trading for the uninitiated. With the Silver Miners ETF heading into multi-year resistance at $31.35 ahead of the metal, I believe there’s a high likelihood that any upside above $31.35 will be short-lived. Institutions do not buy breakouts, nor do they buy parabolic uptrends, and I believe this current push higher is fueled by retail and speculative buying. This means that it likely does not have staying power. The good news for the bulls is that strong support sits at both $27.30 and $25.45, and any 10% rallies that hold above these levels are buying opportunities.
Looking at the above chart of the Silver Miners ETF, the index is running into crucial resistance and is also tapping the upper rail of its current parabolic uptrend. The last test of this uptrend prompted an immediate 10% pullback (July 19th through August 1st), and I would be shocked if we didn’t see a similar reaction from the $31.50 level. The good news for the bulls is that the long-term picture remains bullish with the Silver Miners ETF finally back above its 20-month moving average. This suggests that the 6-12 month view is higher, once we have shaken out some weak hands and have the institutions interested in doing some buying on a pullback.
As long as the Silver Miners ETF remains above $26.00 on a monthly close, I see the SIL as a buy on 10% or larger dips. While there is no disputing that both silver and the Silver Miners ETF are bullish on their monthly charts, things are getting far too frothy short-term. I believe that this move above $31.50 in SIL is being powered by retail as institutions do not chase rallies. These types of breakouts powered by small traders are often bull traps and are unsustainable long-term. This is presenting market participants with an excellent opportunity to book some profits and look to buy back silver miners after a 10% or larger correction. The first spot to begin nibbling from a low-risk area would be $28.00 on SIL.
The Global X Silver Miners ETF (SIL) was trading at $31.11 per share on Thursday morning, down $0.24 (-0.77%). Year-to-date, SIL has declined -4.69%, versus a 9.74% rise in the benchmark S&P 500 index during the same period.
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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..