Trading and Investing Based on Market Sentiment

The usual clues to changes in market sentiment are to be found by following the VIX index, put to call ratios, the market aversion of or love for safe haven assets like the US dollar, and the breath stock prices. And, in a normal stock trading environment, investors and traders have time to consider their moves. That breathing space is getting shorter due to the emergence of a social media-driven feeding frenzy that has just pivoted from Gamestop to silver according to Reuters.

Silver broke above $30 an ounce for the first time since 2013 on Monday as an army of retail traders stormed into the metal after betting billions of dollars on stocks last week, triggering risks of a multi-asset melt-up in global markets.

The action in silver, following thousands of Reddit posts and hundreds of YouTube videos suggests that a rise in the physical price could hurt large investors with bearish bets, also marks a foray into a much bigger and more liquid market than individual stocks.

This new force in the investing world has the power to drive prices on chosen targets higher in a big hurry only to leave the chosen target in a precarious position once the herd of retail investors moves on to their next target. Because all of this happens outside of the world of fundamentals, traders are left with the analysis of very short term market sentiment as their only recourse, other than avoiding these trades completely.

Investing According to You Tube and Reddit

Reddit calls itself the front page of the internet and includes a group of online “communities.” Prevalent among them during the stock trading frenzy are Wall Street Bets, Robinhood, investing, stock market, and options forums. Retail investors who follow these forums, share their trades, and invest based on the most recent posts managed to drive Gamestop to stratospheric levels before moving to other targets. Some of the posts offer reasoned explanations and some simply are opinions. The sentiment that they produce drives markets and can have huge impacts as more and more readers pile on. Investors post videos on You Tube as well in which they explain their reasoning, hoot about their profits, and try to convince more people to get into the game.

How Much of This Is Pump and Dump?

We wrote about the bitcoin pump and dump at the end of 2019. To the extent that someone has the money to trade, can afford to lose it, and have a professional skill set, they are welcome to bet on this sort of trading. Our concern is that those who are simply betting on stock or silver price rises and basing their bets on a quick look at a You Tube video, are more likely to get hurt in the end than make money. FOMO (fear of missing out) seems to be a big motivator in this situation. If you are going to make money in the midst of a retail investor frenzy you will need to move quickly, accept a reasonable profit, and leave before the rest of the crowd. Otherwise, you will be like too many who put the second mortgage on their home in order to buy bitcoin at $19,000 before it fell back to $6,000 or bought at $40,000 before it fell back to $33,000. In regard to silver, some of us still remember when the Hunt brothers tried to corner the silver market and Silver Thursday when the precious metal fell from over $100 an ounce back to $10 and later back to $6.

Predicting the Next Retail Investment Frenzy – Slideshare Version

Predicting the Next Retail Investment Frenzy – DOC

Predicting the Next Retail Investment Frenzy – PDF

The smart investor thinking about how to buy silver needs to constantly ask himself what is a good investment and what are safe investments? When chaos threatens throughout the world, investors look to precious metals such as gold and silver as safe havens. Ongoing unrest in Egypt, riots in Saudi Arabia, threats of labor unrest in the USA all have an unsettling effect on investors. To the extent that silver is going up because of short term political unrest there is always the risk of a correction when things settle down. To the extent that the huge national debts taken on in response to the worse recession in 80 years stress national currencies, silver may remain a good investment for years to come as the dollar declines in value and silver rises. A bit of history, however, is instructive. This has to do with the Hunt brothers and their attempt to corner the market on silver.

How to buy silver is to keep in mind the lesson of the Hunts. Nelson and William Hunt, sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., started buying silver in the early 1970s. By 1979 they accumulated roughly a third of the refined silver bullion in the world, excluding that in government vaults. Silver went from around $6 an ounce throughout the decade to over $48 an ounce in the last months of 1979 and to nearly $50 an ounce in January of 1980. The Hunts were heavily leveraged and when the market corrected the Hunt brothers were faced with a margin call of $100 million. Many investors jumped on the band wagon as prices skyrocketed in the heady days of late 1979. Inflation had been rampant throughout the later part of the decade and many saw silver as their opportunity to regain wealth eroded away by the inflation, or stagflation, of the era. When the price of silver began to fall it was dramatic, falling 50% in four days and to less than $12 an ounce two months after its historic high. It was on an especially brutal day, called Silver Tuesday, that the Hunts were presented with the $100 margin call and the risk of $1.7 Billion in losses. The prevailing opinion was that several Wall Street investment houses and large banks were put at risk by the situation. A $1.1 Billion line of credit for the Hunts was cobbled together by a consortium of US banks which stabilized the situation and left silver to go into its twenty year trough. With this little history lesson in mind we suggest that when learning how to invest in any investment vehicle, especially in silver, that the investor start small, do his homework and learn from the lessons of history.

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