The silver market continues to provide textbook examples of the battle between speculators and commercial traders via swing trading vs. trend trading. The silver futures market is arguably the most prone to speculation of all the commodity markets. The combination of volatility, contract size, and historical lore make it a favorite among commodity market speculators dreaming of 1970’s inflation or, simply another run above $40 per ounce. In fact, the last time the large speculators were net short was in April of 2003. Unfortunately for the speculators, their track record could care less about their feelings. Speculators recently set another record long position and once again, they’re being forced to run for cover.
Speculators began returning to the long side of the silver market shortly after it bottomed last December. The market began to build a base, and once it climbed above its long-term moving averages by the end of January, speculators came back to the buy side in full force. Their buying pushed the market towards what ended up being a double-top near $18.60. The pricing structure showed speculators purchased nearly 60,000 contracts between $16 and the highs at $18.60. The speculative position became so lopsided that by the March run to $18.60, speculators were long more than 5.8 contracts for every short position. The combination of net position, total position, and our COT Ratio define market conditions highly conducive to retracement rather than trend extension.
Meanwhile, silver miners have been forced to determine if they’ll continue to be stuck selling below $20 per ounce or if the price can find a jolt. Their actions clearly show that while they may hope for higher prices, their business plans have them preparing for the reality of lower prices ahead, as evidenced by the new record net short and total positions set in April at prices below $18.60. Prices would’ve been supported if we’d seen silver processors chasing the bid higher on the runs to $18.60. However, the new net short record is evidence that the processors aren’t the least bit concerned about prices getting away from them. That is an important point in a market as driven by momentum as silver.
Now, that the market has fallen below the recent support at $16.90 we think momentum has shifted to the short side as all of the speculative money put to work this calendar year falls into negative territory. In fact, we wouldn’t be the slightest bit surprised if this forces the market towards the $14 low and really shakes out the speculative bid.
Finally, we must comment on the cattle market. Cattle have rallied more than 50% since their October low near $87. Processor purchases stemmed the decline as cattle fell to bargain prices. In fact, processor buying on the rebound pushed live cattle to the January high. However, commercial processor buying transitioned to producer selling as the market moved towards $114 near the end of March. The last surge higher at the end of April and beginning of May has brought producers’ forward selling to record levels in both net and total position. Record producer selling is highly indicative of a market that has overshot the producers’ anticipated supply. The May leg higher, that was driven by weather concerns and supply shortages, leads to the typical “Buy the rumor; sell the fact” commodity spike routine. Rarely does the reality turn out to be as dramatic as the speculators anticipate. Track those who know, control risks, and trade for a value-based reversal.