Is It Time to Take Profits on Silver?

It’s been an incredible past few weeks for silver (SLV) with the metal finally playing catch-up after a horrid relative underperformance vs. gold (GLD). The metal is now up 15% for the month and 18% year-to-date, after briefly staring down a significant double-digit loss during the mid-March turbulence.

While this performance is a huge change of character and suggests that higher prices are likely long-term, we are seeing a problem short-term: extreme optimism surrounding the metal.

Over the past couple of weeks, we’ve seen multiple calls for $35/oz silver before year-end, and it’s always worrisome when market participants are talking about 50% higher prices after we’ve already witnessed a sharp rally. Therefore, I believe investors would be wise not to chase silver here above $21.00/oz.

(Source: TC2000.com)

As we can see in the chart above, it’s been an impressive two months for silver as it continues to outperform the yellow metal, more than offsetting the significant underperformance since the start of 2020.

While we have not yet confirmed a bullish turn in this indicator, which will require a move above 0.125, this is a definite step in the right direction as we now have an uptrend in place. Generally, silver leading gold is an excellent sign for both metals, but especially for silver, and this suggests that higher prices are likely long-term for both metals.

Unfortunately, the worst thing for a bull market is extreme optimism, and we can now see the first signs of that in silver. This doesn’t mean that this bull market is in jeopardy; it merely suggests that it’s getting over-heated and could use a pause. Let’s take a look below:

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

If we look at the chart above, we can see that the best time to buy silver is when it’s trading below the 50% level and close to the green zone. Conversely, the best time to take profits is when silver heads into the red zone, an area of extreme complacency.

The last time the metal went into this zone was in late August 2019, and the metal saw a 15% correction in less than three months, the last thing that market participants were expecting at the time. However, this is precisely why that correction occurred, everyone was looking up, and the market tends to make a fool out of the most people possible.

Given that everyone is now looking up again, and looking for $30/oz silver, a pullback here would not be surprising. Let’s see if the technicals are confirming this:

(Source: TC2000.com)

As we can see from the technical picture, we now have new support near the breakout at $18.00/oz, but we’re now within a hair of strong resistance at $21.25/oz for silver.

Therefore, for investors that were buying the dip in silver below $17.00/oz, this is a good area to book some profits, especially in silver miners that have seen a strong run.

While we may break above this $21.25/oz resistance level, I believe it’s less likely given that we now have a very crowded trade on the long side.

The recent rally in silver has finally converted many non-believers into bulls, and this does not bode well for silver short-term. We now have 8.5 bulls for every 1.5 bears in silver based on an 85% optimism reading, and this is rarely a good sign for the metal.

Based on this, I am taking some profits in my silver miner positions, and I would caution against adding new exposure here. It is certainly possible that silver can move a little higher as retail begins to pile into this trade finally, but I prefer to be buying when retail is spooked, not finally plowing into a trade they’ve been ignoring for weeks.

As long as the bears can defend $21.25/oz on a weekly close, they will be able to keep a lid on this silver bull market for the time being.

Disclosure: I am long GLD, PAAS, SILV

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 $19.56 per share on Tuesday morning, up $1.03 (+5.56%). Year-to-date, SLV has gained 17.27%, versus a 2.29% rise in the benchmark S&P 500 index during the same period.

SLV currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 34 ETFs in the Precious Metals ETFs category.