It’s been a volatile six weeks for the silver (SLV) market since the silver squeeze movement in late January, and the metal is now nearly 15% off its highs. This sharp decline shouldn’t be surprising for investors because sentiment soared to just shy of exuberant levels six weeks ago, with silver briefly becoming one of the most crowded trades for two weeks. This article examines whether this recent pullback is likely to continue or if this is just a healthy shakeout within a bull market in its infancy.

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

As shown in the chart above, bullish sentiment for silver has finally begun to cool off as of Wednesday’s close and now sits at a reading of 50%. This is a massive improvement from multiple readings above 85% bulls in late January, which suggested that the trade was starting to get crowded. This short-term exuberance can be attributed to the decision to thrust on the bull thesis for silver onto the Wall Street Bets [WSB], with the hopes that they could instigate a squeeze in the silver price. While this looked like it might be working, it’s much more challenging to squeeze a commodity vs. a stock, which explains why the rally was ephemeral.

Fortunately, this 15% correction in the silver price and 40% correction in many silver miners is slowly shaking the weak hands out of this trade. This is positive news and a step in the right direction because it’s very difficult for a market to make upside progress when the crowd is predominantly bullish. So, while this current reading of 50% bulls does not suggest silver is a low-risk buy here, silver investors can take comfort in the fact that sentiment has dropped back to a neutral reading from a contrarian bearish reading six weeks ago.

(Source: TC2000.com)

Moving over to the silver/gold ratio, we can see that it still remains very healthy and in an intermediate uptrend despite the recent correction. Generally, the time to be cautious on gold and silver is when this reading is trending lower, which means that silver is lagging gold on a medium-term and long-term basis. Conversely, buying opportunities arise when silver is lagging gold over the short-term, but the trend remains healthy on a medium-term basis. We have the latter scenario currently, which increases the probability that the August 2020 highs will be surpassed and that this correction is a healthy culling of the weak-handed bulls.

So, what’s the best course of action? 

As shown below, silver is sitting in the upper portion of its range with resistance overhead at $28.90/oz and support below at $22.00/oz. As long as the bulls can continue to defend $22.09/oz, the long-term bullish picture and 2020 breakout will remain intact. However, the goal is to buy as close to this support level as possible, with purchases ideally closer to the 200-day moving average at $24.00/oz. Given that silver remains well above this level, I see the metal as a Hold currently.

(Source: TC2000.com)

Fortunately, there are other ways to play silver, with one of them being Wheaton Precious Metals (WPM). This is a high-margin business that’s sitting near multi-month support and trading at barely 24x FY2021 annual EPS estimates of $1.60. This may seem high, but it’s quite low for a ~75% margin business relative to most other 70% margin businesses that trade above 40x earnings. Assuming the stock returns to its historical P/E ratio of 35, it has more than 40% upside from current levels.

(Source: Company Filings, Author’s Chart)

The silver bulls will proclaim that physical silver is the best way to play the silver market, but this couldn’t be further from the truth. WPM offers an annual dividend (vs. holding costs), a cheap valuation relative to historical levels, and leverage on the silver price if one is bullish on the metal. Therefore, I see WPM as a much better play vs. SLV. If I were looking to start a position in SLV, I would be looking to buy closer to support, at $24.25/oz or lower.

Disclosure: I am long GLD

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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