Tuesday, April 12, 2011
Everyone wants to be popular.
We all want the respect of our peers. We crave the adoration of friends and family. It's a natural human condition to desire popularity.
But in the financial markets, popularity is a curse. It's the popular trades that blow up. They suck us in and get us thinking how cool it is to be in this trade or that trade. Then, at the precise point where everyone loves the trade, the market blows it up.
The market hates popularity.
Indeed, if we were in high school, the market would be the one shooting spit balls at the homecoming queen. And right now, that queen is silver.
It seems everyone loves silver. And why not? It's had a spectacular run. It's trading at its highest level in 31 years. It's up over 100% since last September. And all sorts of market pundits believe we could see $50 per ounce over the next few months.
Who wouldn't want to hang out with the most popular kid on the street?
But before you go and offer up all your lunch money to become part of the "in" crowd, take a look at this chart...
This is a long-term chart of the price of silver plotted against its 200-day moving average (the blue line). The 200-day moving average (DMA) serves as a magnet for the price of silver. Any time the price drifts too far above or below the line, the magnet pulls it back in.
The red lines on the chart highlight times when silver was trading 50% above or below its 200-DMA. When the chart is too far above the line, silver is popular. On the previous two occurrences – in early 2006 and early 2008 – the market dealt with that popularity by crushing silver 33% and 60%, respectively.
In October 2008, silver was trading about 50% below its 200-DMA. The metal was horribly unpopular. It was the nerdy, pimply teenager nobody wanted to hang out with. Of course, that turned out to be the best time to buy it.
Today, silver is trading more than 50% above its 200-DMA. It is, once again, a tremendously popular trade. Everybody's talking about it, and everybody wants a piece of it.
Be careful. While it's nice to hang out with the popular kids, it's best to stay out of the way when the spit balls start flying.
At the very least, silver needs some time to consolidate its recent gains. The best case is the metal could hang out here for a while and give the 200-DMA a chance to rise up closer to the current price. The worst case is silver could be headed for a nasty correction.
Either way, if you're thinking about buying silver, you'll likely get a safer entry level a few months from now.
Best regards and good trading,
"People ask me which currency to hold their gold or silver in... which currency has a better chance to hold its value over the years," Chris Weber wrote recently. "This is not the right question. You are not buying currency. At least, you are not buying paper currency..."
In this DailyWealth, Chris shows us a different way to view silver holdings. If people began judging silver in these terms, he says, it would be a happier and wealthier world. Learn more here: A Radical Way to View Your Gold and Silver Holdings.