Traders Misled as Squeeze on Silver Fails

Two weeks ago, masses of retail investors pushed the price of US stock Gamestop higher in a strong sign of herd mentality. Last week, retail investors turned their attention to silver, attempting to manipulate the price to push it to unprecedented highs, as they were alleging that silver was the next short squeeze for hedge funds. 

Traders blindly buying silver unaware of the risks

On Monday, 1 February, silver rose to a high of $28.60 USD/oz due to demand, as retail traders rushed to grab a bargain like shoppers outside Myer during Boxing Day sales. However, it quickly retreated on Tuesday to trade lower than it opened on Monday and by 4 February, it had fallen to $26.33 USD/oz. Silver is currently trading at $27.00USD/oz (as of writing), which means, retail investors are most likely holding on to losses and wondering what happened.

Many Australians, trying to get in hoping to make it big, were blindly buying silver stocks unaware of the risks they were taking. If we consider Australian silver miners, outside of S32 the majority are very small. For example, Golden Deep (GED), one of the biggest movers in this latest dash for cash by retail traders only traded 120 million shares on 1 February at around $0.01, meaning $1.2 million dollars of stock was traded on that day. However, on a normal trading day, typically one to two million shares is traded on GED, equivalent to $10,000 to $20,000 dollars.

While I appreciate the desire to make money, there are always those who like to chase rainbows hoping to find that elusive pot of gold, which is why lotteries are so popular. However, unlike the lottery where you only pay a few dollars for a ticket, those who chase rainbows in the stock market typically lose thousands of dollars and sometimes much more. Reading chat forums or watching YouTube videos hoping to find the next big winner is a pursuit that generally results in the opposite occurring and rather being a master of the market, many become a statistic.

When it comes to the stock market, the rules do not change and those who choose to ignore them do so at their own peril. My advice is do not invest in something you do not know or understand, always do your research so you know why you are buying and always ensure you have an exit strategy. Finally, yet just as importantly, avoid following the herd at all costs.

What were the best and worst performing sectors last week?

Information Technology rose strongly on Friday, making it the best performing sector up 6.05 per cent for the week followed by Financial Services up 5.66 per cent and Consumer Discretionary up 4.43 per cent. The worst performing sectors included Utilities, which was down 1.01 per cent followed by Consumer Staples up 0.47 per cent and Materials up 1.92 per cent.

The best performers in the ASX/S&P top 100 stocks included Tabcorp Holdings, which was up 15.04 per cent on news of a potential buyout from a UK betting company. Nine Entertainment was also up strongly, rising 13.28 per cent and continuing its strong run over the past ear with the stock rising over 200 per cent. Boral also rose strongly up 13.02 per cent.

The worst performers included Worley down 8.32 per cent followed by Northern Star Resources down 7.63 per cent and Origin Energy down over 4.43 per cent.

What's next for the Australian share market?

What an interesting week it was for the Australian stock market. After falling away last Monday, as I expected, it quickly turned to rise strongly closing higher on three of the next four days to finish the week up 3.52 per cent for the week. Previously, I indicated that the market would peak and start to fall away for a short period.

While last week would technically be considered a down week on our market, as it traded lower than the prior week, the move down really occurred over four trading days in the prior two weeks. While I indicated the move down would be short, it was much shorter than I expected.

So can we expect further falls or is the down move over? Technically, it is possible we will see more downside in February although this is yet to be confirmed and I am expecting one of two possibilities to unfold. The first is that the market will rise this week and continue up for the next couple of months, making a new all-time high before moving down into the next yearly low.

The other possibility is that it will fall for one two weeks with the market travelling down below 6,500 points before rising again. Either way, I expect the Australian market to trade higher over the next couple of months and in doing so make a new all-time high. For now, I encourage everyone to be patient while we wait for the market to confirm a direction.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.