Seasonal Strength
The article that follows was originally written by me for
RealMoney.com. There was a great deal of interest in it and
many of you have not seen it. It is reprinted below since it is
especially relevant at this time.
Background
Although the bull market in silver began in 2001, it did not attract
much attention from investors or analysts other than the
traditional “precious metals bugs.” At that time my cyclical
analysis of the approximate 10-year pattern in silver prices
strongly pointed to a bull market.
The market rallied slowly at first and then, inspired by concomitant
bull markets in platinum, gold and copper began to move
rapidly higher. Eventually, the “experts” who had been telling us
that “there was no room for precious metals” in their investment
portfolios, took notice and ultimately turned bullish. Although
they did so somewhat late in the game, the market continued
to surge higher, accelerating rapidly to the upside from August
2005 until the recent top in May 2006.
Prices then fell rapidly in a long overdue correction which brought
the market down to my long-term technical support area where
prices consolidated and began to recover. While the existence
of the largest silver bull market since 1982 cannot be denied,
the recent top, as well as the supposedly cooling US economy,
may give bulls pause to consider the fate of silver prices. Have
we seen the top? Is this merely a pause in a bull market that
might rival the “mother of all silver bull markets” of the late 1970’s
and 1980? Is it safe to buy now or is a further correction due?
Have we passed the peak of the approximate 10-year cycle?
The long-term trend indicators I follow do not, as yet, show signs
of a peak. In fact, there is good reason to believe that silver can
still move higher before the ideal time frame of a top, which I
project as mid to late 2007. But cycles are not perfect and find
tuning is always a necessity when using a gross indicator such
as a long-term cycle.
What About the Short-Term?
While the long-term outlook remains cautiously bullish on my
indicators, the short-term outlook may be of greater concern to
traders and to investors who have either taken profits and want
to buy again, or investors who have remained long and seek to
add to positions. I believe that the overriding short-term technical
consideration is the seasonal pattern in silver.
In my recent article on the seasonal outlook for gold, I cited
the historically valid tendency for gold prices to rally from
late August into late September. I cited strong historical
evidence in support of my outlook within the caveat that
seasonals are not perfect, and that it would be best to use a
short-term timing trigger to enter the expected seasonal rally
in gold. Silver has also exhibited a distinct and undeniable
seasonal tendency during the month of September.
Silver’s Seasonal Song
The history of silver price rallies during September is quite
remarkable. The silver seasonal trade table shown below
illustrates this pattern. Here are the “ground rules”:
· The ideal buy date for December silver futures since 1972
has been 1 September on the daily CLOSE of the market
· The ideal exit date was 21 September on the daily
CLOSE of the market
· If the market was closed on the ideal entry or exit date
then the entry and exit date were on the CLOSE of trading
the next business day
· The CHANGE column on my report shows the difference
between the entry and exit date prices
· The TOTAL column shows the running total of up and
down changes (i.e. cumulative total)
· If the DATE OUT column shows an exit prior to the ideal
exit date this means that the trade was stopped out at a
loss
· The TOTAL YEARS under study was 34
· The closing price on the exit date was higher in 27 of the
34 years under study or 79.41%
· The average change in the winning years was over 65
cents
· The average change in the losing years was 35.3 cents
· The ratio of cumulative gains vs. losses was 7.2 : 1
· The historical record assumes an 8% closing stop loss
below the price on the date of entry
What Can We Conclude?
Critics of seasonality will point to the fact that since the late
1980’s this pattern has been lackluster. And they are correct.
The reason for this is simple: The tendency for silver
prices to rally in September is, to a large extent, a function of
the underlying trend in the silver market. In bullish trends the
seasonal tends to be more reliable as well as large. In bearish
years the move can actually be down or, at best, muted.
An examination of the history reveals some fascinating details
as follows:
· Since 1988 the record has been “spotty” inasmuch as the
performance of this pattern has not grown appreciably.
· During the huge bull markets of 1979, 1980, 1981, and 1982
the gains were stellar.
· Gains have also been strong in other bullish years
· Performance has been “hit or miss” in bearish or
sideways years.
CONCLUSION: Silver prices have shown a strong tendency to
move higher during the indicated dates in September when the
underlying trend has been higher. We are currently in a strong
bull trend as September approaches. If history repeats then silver
could shine brightly next month. Fasten your seat belts!
