Sell in Early May and... Lose On Average $1 per Ounce of Silver Each Year

By: Przemyslaw Radomski | Fri, May 14, 2010
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This essay is based on the Premium Update posted on May 14th, 2010.

We would like to begin this essay by touching on the popular belief that precious metals - and especially silver - tend to drop heavily this time of the year. The saying suggests selling in May and going away - is this really the best way to go? At Sunshine Profits we're rather reluctant to take the common knowledge for granted - we prefer to dig deeper and check ourselves if every fact is really fact, not just an opinion.

So, while the "sell in May and go away" phrase does appear close to being true, we would still prefer to provide you with details before making final calls. This week, we will provide you with two seasonal silver charts, as the white metal is known for is seasonal tendency do decline in May. Let's begin with the May chart, and then we will move to the June one.

If you are not familiar with the way of reading these charts - you will find a quick reminder below.

While the idea of seasonality is nothing new - for instance, most investors are aware of the summer doldrums pattern, which means that virtually all markets tend to trade sideways in the middle of the year, we are taking it to the whole new level not only by focusing on the precious metals sector itself, but also by taking a very detailed approach allowing for the seasonal patterns to be used also in short-term trades. Additionally, we are measuring the quality of projections made using this tool. As you will soon see, there are times when these patterns are really reliable and there are times when they are to be approached with caution.

The way the below chart "works" is this - we've checked silver's performance in each May/June from 2002 to 2009 and extrapolated silver's average performance to where it was at the beginning the month. If the history is to repeat itself then perhaps the average performance of silver in May provides us with a "road map" to where it is likely to go during the whole month. Of course gold does not move in the same way each year at the same day, but at times these tendencies could provide a valuable confirmation or (which is even more important) non-confirmation.

Silver Seasonality - May

Surprising, isn't it? Based on the way silver performed in Mays from 2002 to 2009 we see that silver has used to move over $1 higher during May with the top being right at the end of the month. Yes, there is also a tendency for the white metal to move lower in the middle of the month, but it tends to rise once again in around the third week of the month or so. Then, the local top is formed around the end of the month.

So, does the above chart say that silver will go above $20.60 at the end of the month? No. No promises here, of course, but it does say that this is what used to happen on average so the "more average" this May is, the more reliable the above "roadmap" gets.

Taking a look at the green slope (quality of projection), it tells us that silver being 80 cents above the May 1st level is more certain at about May 27th, than it is at May 13th - the quality of projection is slightly higher in the former case.

Therefore, although it may seem like a no-brainer to dump one's silver holdings right now, seasonal tendencies don't scream "sell" at this point yet, as silver tends to rise during the whole month of May. In other words, while we may move slightly lower from here, seasonal tendencies suggest that PMs are going to be higher in about two weeks than they are at this moment.

Now, June the situation in June is quite different...

Silver Seasonality - June

While the second half of June is nothing to call home about, the first two weeks tend to wipe out May's gains. While silver used to rise about $1 in May or so, it also used to decline about the same amount in June. Please note that we used Thursday's close as the beginning price for June. The goal was to put percentage moves into proper perspective, not to tell you that we expect to see silver at that price on June 1st.

The first 10-15 days of June are most likely to provide us with lower silver prices - still, the white metal didn't use to plunge before the end of May.

Summing up, silver - and also the rest of the PM sector - is not likely to plunge severely now - odds favor a decline in a week or two. Still, the main point here is that the "sell in May and go away" is slightly inaccurate, as the top is usually formed right at the end of the month. If one took this advice to the letter and sold in early May each time during the past 7 years, one would on average miss out on a $1 rally each year in silver. Therefore, let's keep in mind that there's much more to the analysis of the seasonal tendencies than just suggesting to "sell in May and go away."

Now, let's take a look at how we could translate the above analysis to the current situation. As you may know, this is just a small version of the whole analysis, so we will not cover everything here - instead, we will focus on PM stocks. Let's begin with the long-term HUI Index chart (charts courtesy by http://stockcharts.com.)

HUI Gold Bugs Index

With respect to the mining stocks, last week we mentioned that the HUI was ready to move above its resistance level. As we know now, this finally happened for the first time since its February bottom. The strength of this move and the resulting momentum are significant. We may, in fact, see the whole PM market move higher. The RSI, slightly above 70 suggests that we are close to a local top but not necessarily at one.

What we see in our analysis of the charts leads us to believe the local top will be at or near the 2009 high. This reasoning is based i.a. on the fact that this level proved to be a very strong resistance level during both 2008 and 2009 highs.

GDX Market Vectors Gold Miners

Turning to the short term GDX ETF chart, we can analyze volume, which recently has seemed to be on the low side along with lower values of the ETF. This is normal during small pullbacks - not a signal of coming decline. So, we are bullish at this time to see a small move upwards.

Still, mining stocks do not show as great a potential as silver and gold at this time. In the Wednesday's Market Alert we wrote the following:

Given the strength of the momentum (confirmed by volume) it seems that PM stocks may need to slow down before the local top (also in gold) is reached. This is what we usually see before the top is in, and we didn't see it so far.

One other fact, which we wish to make note of here, is that the bottom, which we forecasted, took place exactly as stated (marked with the blue ellipse on the chart).

GDX:SPY Market Vectors Gold Miners/S&P500 SPDRs

For a final chart in this essay, the GDX:SPY ratio often forms tops and bottoms along with PMs and PM stocks. Therefore, what's bearish for the ratio is partly bearish for the whole PM market. As we have mentioned in the previous updates, tops are often accompanied by a huge volume, and they take place when the RSI is right at the 70 level.

The latter has been the place recently, so the question is if the volume has been high or not. We have marked it on the chart with a big red arrow as it is visible on a relative basis, but if we take into account the volume that we've seen from November 2009 to mid-April 2010, we see that the very recent volume is quite normal.

Comparing the current situation to what we've seen in November 2009 (final stage of the rally), it seems that perhaps we might need to see more significant spike in volume before we can state that the top has been confirmed.

Summing up, we are presently less bullish on PM stocks than on PMs, and we believe that they are not going to perform as well in the final stage of the rally, which by itself will serve as a confirmation that it is - in fact - the end of the rally.

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Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski

Author: Przemyslaw Radomski

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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