Silver: Sentiment Continues To Be A Headwind

It’s been a frustrating couple of months for silver (SLV) investors as the $50/oz silver targets have been swept under the rug, and the metal has been unable to gain any traction the past six weeks.

While SLV entered the month of August as the best performing ETF, it’s been dethroned by the Solar ETF (TAN), falling to 7th out of the top 100 ETFs. This significant shift in performance is likely due to how crowded the silver trade was as the metal approached $30.00/oz in early August.

Unfortunately, this hasn’t changed much despite the 20% plus decline silver endured from its highs. Therefore, while the fundamentals and long-term picture remain bullish, this consolidation could last a while longer until some bulls start capitulating. Let’s take a closer look below:

(Source: Daily Sentiment Index Data, Author’s Chart)

As we can see from the chart above, silver spent nearly a month in the extreme optimism zone (red shaded area), which has led to negative returns for the metal over the following 1 month and 2 months in over 80% of occasions.

Thus far, this time is not looking different as silver finished the 1 month from the peak with a (-) 5% return, and is on track for a negative 2-month return if it cannot head back above its highs near $28.00/oz. Unfortunately, while a sharp decline of this magnitude would typically result in a complete reset of sentiment, we haven’t seen this yet.

Instead, bullish sentiment for silver continues to hover near 70% bulls, suggesting more than two bulls for every bear in the market. While I have no issue with a reading like this if silver is rallying sharply, as we’d expect bulls to outweigh bears on a daily basis in an up-trending market, it’s unusual to see sentiment this high after a 20% drop in an asset class. Therefore, while I believe that the $23.50/oz low in silver should hold, I would be shocked if the metal made new highs before the election.

This is because sentiment continues to remain a headwind, and asset classes typically consolidate and rarely make new highs following a steep correction until sentiment has completely reset.

(Source: TC2000.com)

If we look at the daily chart above, the resistance I outlined at $27.80/oz continues to be a brick wall, and there’s no reason to believe the correction is over until this area is reclaimed on a weekly close.

For now, the bears have successfully defended this area on several tests, and there’s no reason to load up on silver or silver miners until this changes. The good news is that the metal has very strong support at $21.50/oz to $23.50/oz, so any pullbacks to this area should find strong buying support.

The other silver lining is that this consolidation allows the 200-day moving average (yellow line) to play catch-up, and it should be at $23.00/oz by November. Generally, the 200-day moving average is a floor for an asset class during the early innings of a new bull market.

While many investors in the metals space pointed to loose monetary policy and continued stimulus as reasons for the metals hitting new all-time highs in the fall, I believe that we might have to wait until winter for this to happen.

This is because even though the fundamentals are clearly a tailwind with inflation being the likely result of this loose monetary policy, excessive bullish sentiment is a headwind, and sentiment tends to rule over the short-term. Therefore, investors should be selective in buying their silver miners, and only buy on nasty down days, and refrain from chasing rallies as this consolidation could last a while longer.

For now, I remain bullish on silver and silver miners (SIL) long-term, but I am neutral short-term until sentiment cools off. Therefore, while I continue to hold existing positions in Silvercrest (SILV) and Pan American Silver (PAAS), I have no plans to get aggressive just yet.

Disclosure: I am long GLD, SILV, PAAS

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.

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The iShares Silver Trust (SLV) was trading at $25.04 per share on Thursday morning, down $0.19 (-0.75%). Year-to-date, SLV has gained 50.12%, versus a 5.81% rise in the benchmark S&P 500 index during the same period.

SLV currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #21 of 34 ETFs in the Precious Metals ETFs category.