Silver Miners: Sentiment Getting Overheated

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Includes: CDE, FNLPF, GDX, GDXJ, GLD, GPL, HL, SIL, SILV, SLV, SLVP, WPM, XME
by: Taylor Dart
Summary

While gold and the gold mining indexes and powered to new 52-week highs, silver miners continue to be left behind as a group.

Sentiment in silver is a little ahead of itself short term, and this may lead to new bases being built among the silver miners while sentiment cools off.

As long as as the bulls can defend $25.70 on a weekly close on any dips, they remain in control of the medium-term picture.

While many gold miners (GDXJ) have enjoyed parabolic runs in the past several weeks, the majority of the silver miners seem to have been left in the dust on a relative basis. Two names which are performing well are Wheaton Precious Metals (WPM) and SilverCrest Metals (SILV), which I mentioned were the two leaders in the group, but otherwise, Hecla (HL), Coeur Mining (CDE), Great Panther (GPL) and, last and also least, Fresnillo (OTCPK:FNLPF) have mostly treaded water since mid-July. The reason for this pause in the majority of the names is likely due to sentiment, which approached July 2016 levels last week in silver (SLV). Consistent readings above the 90% bulls level generally is not much help to a group, and typically is a headwind for the majority of names in a sector. Until this sentiment can cool off a little, I don't expect the Global X Silver Miners ETF (SIL) to make a tremendous amount of progress from the current $28.25 level. The good news, however, is that even if the index does correct to shake out some weak hands, strong support should come in at the $25.75-25.90 area on any pullbacks.

If we examine a chart of Daily Sentiment Index data below for silver, we can see that the number of bulls in the commodity spiked above the 90% level and held there just over a week ago. It did this same thing in July 2016, and silver ended up trading 4% higher and making a marginally higher high, before topping for the year. While I'm less inclined to believe that the current move to $16.50 for silver will mark the high for 2019, I would be shocked if this short-term exuberance didn't lead to some more choppiness among the silver miners. When everyone is in the pool and enjoying themselves, it's time to jump out, get your towel, and come back when it's a little less crowded. This does not mean that one should exit all their positions in silver currently; it merely means that there's likely a better opportunity to start new positions at lower levels.

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

(Source: Daily Mail UK, ExclusivePix Media)

The reason I’m optimistic that this won’t be a 2016 repeat for silver is that gold (GLD) has put in a new five-year high, and this was not the case in 2016. While gold's new five-year high above $1,380/oz does not guarantee that silver will follow along, generally silver does follow, even if it lags by several months as it did in the 2002-2003 period. Gold broke out in late 2002, but it took silver nearly a year to join the party in Q4 2003.

(Source: TC2000.com)

So, how does this short-term exuberance affect the silver miners? It does not have to, but typically, the metal and the miners move pretty closely together. Looking at the below weekly chart of the Silver Miners ETF, the index tried to break out of its lower box and did put in a weekly close above $28.25 resistance, but hasn't seen any real follow-through since. This is a divergence from the way that the Gold Miners Index (GDX) acted when confronted with resistance near $25.00, as it bulldozed right through that level with ease. As long as the Silver Miners ETF can stay above $25.70 on a weekly close, the bulls will remain in control of the intermediate-term time frame (3-6 months). The issue is that the index is a little extended up here, and some sideways action or a minor correction is likely the most probable scenario.

(Source: TC2000.com)

Moving to a chart of the Silver Generals, which are the six largest-capitalization silver companies within the Silver Miners ETF, we can see that the leading names are extended, while others are taking a needed rest here. I do not include Fresnillo in this list, as while it is a US-traded company, it does not trade on the big boards and is an OTC name. If included in the list, it would be the weakest with Hecla Mining, as both of them are still locked in intermediate downtrends.

(Source: TC2000.com)

Currently, the leaders among the Generals are Wheaton Precious Metals, First Majestic Silver, and SSR Mining, all of which have moved to new 52-week highs. Wheaton Precious Metals is the most impressive of the group and one I am watching closely for an entry if it sets up properly, whereas Hecla Mining and Fresnillo are the two dogs in the group and carry much higher risk. The fact that Hecla and Fresnillo have not been able to start new uptrends even with the strength in silver tells me that they are much less desirable to funds. While the funds look like they've been gobbling up Wheaton Precious Metals and SilverCrest Metals based on the price action, their behavior is much more lukewarm on Fresnillo and Hecla Mining. One reason funds may be aloof with Hecla is that the company is not expected to see positive earnings per share even next year, despite the rise in silver prices. When it comes to Fresnillo, the company's higher costs and lightened production outlook is cause for the recent decline. In my view, there is absolutely no reason to waste one's time with miners that cannot execute. Many miners have smartened up from their lax ways in past bull markets and are leaner and meaner from a cost and production standpoint than they've ever been. To focus on the laggards that can't get it together makes little sense.

To summarize, Wheaton Precious Metals, SilverCrest Metals, and SSR Mining are three pockets of strength within the Silver Miners ETF where it might be worth buying dips, and Fresnillo and Hecla are two areas I will be staying far away from no matter how low they go. Miners that aren't making more money and enjoying higher margins despite this rally don't belong in one's portfolio unless one prefers to gamble. The other takeaway from the Generals is that the majority remain above their key moving averages, and this is a positive sign. The key will be if the miners can hold above their crucial moving averages if the Silver Miners ETF does pull back.

(Source: TC2000.com)

Zooming in to a daily chart of the Silver Miners ETF, the critical pivot is $28.25, and this is the area where the bulls want to hold above. While we did get a weekly close above this level as I mentioned, we haven't seen much follow-through since. An inability to put in consecutive weekly closes above the $28.25 level leaves the potential for a re-test of $25.70 support on the table, but I would be surprised if the bulls did not show up here. Ultimately, I view 8% or larger pullbacks in the Silver Miners ETF as potential buying opportunities, and these are completely normal as long as the $25.70 level is defended on a weekly close.

The Silver Miners ETF has undoubtedly made some progress over the past couple of months, but confirmation of a higher weekly close above $28.25 will be required to suggest we have a new uptrend on our hands here. While we do have a higher high in place, the key will be putting in a higher low above the $25.70 level. The fact that the index is weaker than the Gold Miners Index makes it less desirable of an ETF, and this is why I am favoring gold miners to silver miners currently. However, for those that are interested in playing the silver group, the best course of action seems to be taking advantage of dips vs. starting new positions up here above $28.25. I continue to favor SilverCrest and Wheaton Precious Metals among the group if I was interested in stocks vs. the index itself. It rarely pays to be greedy when others are greedy as sentiment in silver currently shows, and this is why I'm being patient. For full disclosure, I am not long any silver miners now but am long a couple of gold miners, as I find their charts much more attractive.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.