Per the latest Commitments of Traders (CoT) data, large speculators are now net short silver for the first time in more than three years, according to Schaeffer's Quantitative Analyst Chris Prybal. Perhaps that's because the malleable metal -- as measured by the iShares Silver Trust (SLV) -- just wrapped up its most bullish time of year, historically. Whatever the motive, silver futures tend to underperform after large speculators turn bearish on the commodity.
SLV Fell Short of Seasonality Expectations
Since inception, the SLV exchange-traded fund (ETF) has averaged January and February gains of 5.7% and 5.1%, respectively. So far in 2018, SLV hasn't quite lived up to those seasonality expectations, though. The ETF advanced a below-average 2.3% in January, and dropped 5.4% in February. In fact, after touching the latest in a string of lower highs, the shares suffered along with the broader equities market in early February, and have since struggled beneath their 20-day moving average, last seen trading around $15.47.
In March, meanwhile, SLV has averaged a 1.1% loss since inception. April has generated a modest 1.2% gain, on average, but May and June are typically the worst months of the year for SLV, which averaged losses of 2.5% and 2.6%, respectively.
CoT Large Speculators Turn Short on Silver
As alluded to earlier, CoT large speculators just went short on silver for the first time since October 2014. After that instance, it was a rough go for silver futures, which were down across the board looking six months out.
In fact, there were two times in 2014 when this group turned bearish on silver, and prior to that you'd have to go back to 2003. Looking at data since 1986, and using only one signal per month, this is just the 16th time this group has turned short on the malleable metal, per Prybal.
While CoT large speculators have been notoriously wrong about the Cboe Volatility Index (VIX) in the past, they tend to be on the nose with silver. Two weeks after turning short, silver futures averaged a loss of 0.07%, compared to an average anytime gain of 0.27%, looking back to 1986. The metal has also averaged losses four and six months after signals, compared to average anytime gains.
The only "sweet spot," really, tends to be at the one-month marker. Four weeks after CoT speculators turned short, silver was up 1.12%, on average -- almost double the average anytime gain. Still, it was higher just 47% of the time after a signal, compared to 50% anytime.
In conclusion, seasonal history suggests silver -- by way of SLV -- could be headed for some choppy waters, with the ETF averaging a May-June loss since inception. In addition, the last time CoT large speculators turned short on silver preceded a notable intermediate-term decline in the commodity, and the metal tends to generate weaker-than-usual returns after this group turns sour.