We must admit, we just don’t see the big short position in the silver market. Maybe it’s out there...and we just can’t see it. However, when we look at the Commitment of Traders (COT) data, it shows that the net short position for the dumb money “specs” is quite neutral. Yes, they WERE very short back in 2019...and that WAS followed by a 35% rally in the commodity...but that was two years ago! As you can see from the chart below, the positioning (at least for the futures traders) is not a compelling one at all right now. We’d also note that looking at the short interest of the top silver mining stocks, there is only one of those stocks that has a high short position...First Majestic Silver Corp (AG).
Again, maybe we’re missing something. Yes, we do follow silver, but it is not something we watch as closely as we watch other assets (including other commodities). Therefore, there just might be something out there that does indeed indicate that the short positions in silver are quite large. However, we’re beginning to wonder where this story is coming from...and thus we also wonder if this story is being spread by people who are trying to sucker individual investors into the commodity (and/or it’s underlying stocks)...so that they can bury them at some point in the future. Let’s face it, “pump & dump” schemes have been around forever!
We want to repeat one more time that we have no idea if this is taking place in the silver market right now, but we just don’t see the evidence that there are large shorts positions in the silver market (with the exception of AG)...like we definitely saw in stocks like GME, AMC, and BBBY recently. Therefore we think those who are buying silver (and most silver miners) on the hopes that they’ll “squeeze” other investors this week should be very careful.
Anyway, the media (the financial media and the broad media as well) have been filled with stories about the GameStop phenomenon and the “David vs. Goliath” stories about the individual investor vs. the hedge funds. These are interesting and important stories. We definitely want the individual investor to be protected...and we don’t want big hedge funds to be bailed out at the expense of the small investor. However, the biggest issue from last week’s developments is that it exposed the massive levels of leverage in the system...and what can (and always does) happen when some of that leverage has to be unwound.
This first round of the “unwinding of leverage” could easily die-down rather quickly. When leverage becomes very large like it is today (which can be seen by the record levels of margin debt in the system), the unwinding of that leverage doesn’t always come all at once. Sometimes the first warning shot is followed by return to the old highs for the markets. However, it is STILL a warning shot across the bow for what is to come eventually. As we all know, record levels of margin debt are a lousy timing tool, but it is ALWAYS followed by a significant period of the “unwinding” of that leverage eventually. Therefore, it is VITAL for investors to have a plan in place IN ADVANCE for when the “unwinding of leverage” becomes more pronounced.
In our weekend piece, we talked about our concerns that a catalyst for a prolonged period of leverage unwinding could be a surprise rally in the dollar. Everybody is on one side of the boat when it comes to the dollar...and the DXY dollar index is now starting to bounce a bit. If the DXY dollar can break above its key resistance level of 91.00, it could cause the kind of rally that will catch a lot of investors off-sides. Given the level of leverage in the system, it’s a good bet that many of these short positions in the greenback are leveraged. Therefore, a surprise rally in the dollar could/should be something that creates another round of “forced selling” in several assets...including stocks. (See our “Weekly Top 10” from this weekend for more details.)
However, there is another issue that could become a catalyst. If the economy were to lock-down in significant way once again, THAT could be something that creates big problems for highly leveraged investors in the stock market as well.......We listened to the head of the Center for Infectious Disease (Dr. Michael Osterholm) this weekend. He was the one who correctly warned people about the upcoming pandemic at the beginning of last year. On Meet the Press this weekend, he called what is about the hit the healthcare system a “category 5 hurricane”...and that the number of cases that need hospitalization could be double what we saw at the peak last year. He went on to say that it was a great that a lot of businesses like restaurants are starting to re-open, but he also said that it is likely that these businesses are going to have to close again before long. Dr. Osterholm basically told us that another lock-down is coming...and that the next 6-14 weeks will be “something that we haven’t seen yet.”
That’s pretty scary stuff from somebody who was spot-on about what was in our future 12-14 months ago (when most people were saying it would come and go without much impact). Dr. Osterholm did say that the vaccine distribution could help mitigate the problem...especially for older people...but he didn’t seem to indicate that we’ll be able to distribute enough of the vaccines to prevent his “category 5” hurricane.
With all of this in mind, we certainly seem to have several possible catalysts for another round of “de-leveraging” at some point in the coming weeks and months. Therefore, even if the markets bounce-back strongly this week, we still believe that investors should use any bounces as an opportunity to raise SOME cash. That does NOT mean they should go to 50% cash...or even 25% cash. However raising a decent amount of cash could/should be a good idea over the near-term. It will help you take advantage of a correction...especially one that involves “forced selling”...because that is when the baby gets thrown out with the bath water and you can pick up some GREAT assets at very cheap prices.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.