Monday, February 1, 2021

Morning Note: Not the silver "short squeeze" you might think...

Sliver is all the rage this morning, as the retail trader -- specifically the one who chats on Reddit and trades, or used to trade, on Robin Hood -- is, either through his/her own perceived genius or, ironically, through the discrete egging on by elements he/she is otherwise committed to destroying, is attempting to squeeze the price of the metal (and the funds that track it) higher, and themselves richer in the process.

This one's fascinating, and, no, it ain't GameStop!

As we discussed, GameStop, and other targets were heavily shorted by Wall Street.

Silver, on the other hand -- being something we hold (via SLV) and are therefore far more intimate with than, say, a GameStop -- while, per the second chart below, there are enough shares of SLV shorted to be squeezed a bit, is, frankly, already a Wall Street favorite.

Here's the five year chart of the net positioning in the metal among futures speculators:

Yes, as you can see, traders have been to no small degree bullish on the metal for quite some time.

As for short interest (shares shorted) in SLV (the ETF that tracks silver), note the recent spike in the second panel below:

So, like I said, there's sufficient supply of shorted shares that, were we to see some panicky covering (we are!), would spike the price. But take a look at the white line in panel one above; that's called the "short interest ratio." That represents how many days, based on average volume (panel 3), it would take to cover (buy back the shorted shares) all of the present short interest. That's 0.59. I.e., all shorts are covered literally in less than a day. Hmm....

So, no, we're not looking at some epic "short" squeeze, as a massive crowd of newbie traders seem to think is about to unfold.

Now, that said, there is another "squeeze" that indeed could do even more of a positive number on the price, it's called a "gamma squeeze" and it has to do with the action in options trading that I explained in last week's main message.

Here's from that post:
"...think in terms of the dealers who sold those small call contracts and collected their premiums for doing so. They're the counterparties, and they're the ones left holding the bag -- making good on -- on those incredible gains the buyers are realizing.

Of course those dealers, no more than can the short-sellers, can't afford such drubbings. So what do they do? They hedge... How do they hedge? They buy the shares themselves... And what does that buying do? It puts additional upward pressure on the price!"

So, sure, silver could indeed go higher as dealers accommodate those call buyers (and hedge themselves in the process). Plus, the likes of SLV (as it literally holds the metal that it tracks) are having to buy the metal, and support the price rise in the process. But, clearly, the Reddit/Robin Hood gang is not sticking it to those big bad guys on this one. Ironically, on balance, they're helping them out, big time!

Again, this is anything but a GameStop scenario. This is a commodity that our analysis says has good fundamental prospects going forward. And, frankly, I'm not at all crazy about what we're witnessing this morning.

I.e., the fundamentals pose a good long-term setup for silver, while this sort of manipulation could actually serve to shorten the life of the metal's bull market, if not kill it all together before it's all said and done.  I'll keep you posted...

Asian equities bounced back overnight from last week's drubbing, while China's moving to add liquidity is presently offsetting weaker than expected purchasing manager reads: 13 of the 16 markets we track closed notably higher.

Data out of Europe overnight was mixed (some good, some not), but traders this morning are definitely focused on the good, as all of the 19 bourses we follow are nicely in the green as I type.

U.S major averages are bouncing a bit this morning as well: Dow's up 131 points (0.44%), SP500's up 0.89%, SP500 Equal Weight's up 0.47%, Nasdaq's up 1.45%, Russell 2000's up 0.81%.

The VIX (SP500 implied volatility) is down 4.74%, but sits at a historically-precarious 31.48. VXN is down 7.40%.

Oil futures are up 0.92%, gold's up 1.08%, silver's up 6.82%, copper futures are up 0.34% and the ag complex is down 0.24%.

The 10-year treasury is down, and the dollar is up 0.39% (that, if it holds, could pose a headwind as today's session unfolds).

Led of course by silver, and followed by energy, emerging market equities, tech and Eurozone equities, our core portfolio is up 0.74% to start the day. Oil services, Verizon, ag commodities and AT&T are laggards.

Think of the following from Benoit Mandelbrot's enlightening book The Misbehavior of Markets as you consider what's going on in the typical retail trader’s portfolio, as well as, I assure you, alas, in too many portfolios managed on behalf of others, be they hedge funds, or otherwise:  emphasis mine...

"If you are going to use probability to model a financial market, then you had better use the right kind of probability. Real markets are wild. Their price fluctuations can be hair-raising—far greater and more damaging than the mild variations of orthodox finance. That means that individual stocks and currencies are riskier than normally assumed. It means that stock portfolios are being put together incorrectly; far from managing risk, they may be magnifying it."

Have a nice day!


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