From the desk of Tom Bruni @BruniCharting
Tuesday’s Mystery Chart is one of my favorite charts right now, so thank you everyone for your feedback and participation.
I received a lot of answers, but most of you were buyers and the rest were split between doing nothing and selling.
With that as our backdrop, let’s get into it.
Here’s the long-term chart of Silver relative to the Russell 2000 reversing higher off of its 2001 lows. Additionally, momentum has gotten overbought for only the second time since 2011 and is stabilizing well above 30.
Click on chart to enlarge view.
Before we get into the question of whether this is another counter-trend bounce before new lows, or if a secular trend reversal is underway, let’s explain why we look at this ratio.
The main reason is that it gives us a feel for what “the junkies” are doing.
Why are they junkies?
For Equities, Small-Cap stocks are a higher risk, higher beta area of of the market. When market participants are bullish Equities, they’ll be buying Small-Caps because they’re willing to take more risk to get more bang for their buck. More volatility, more potential upside (or downside).
In Metals, it’s Silver. Precious Metals bulls are one thing, but Silver bulls are on a whole other level. When Metals market participants are bullish, they’ll be buying Silver for the exact same reasons Equity bulls buy Small-Caps.
Right now “the junkies” are buying Silver. While we’re not bearish US Equities, the fresh breakouts in Precious Metals are the most significant we’ve seen in years and are occurring at a very important level in this ratio.
It’s very possible for Silver and Stocks to go up at the same time…and for Silver to outperform.
For a more comprehensive look at this theme, here’s an Equal-Weight Precious Metals Index relative to the Russell 3000.
Looks pretty similar right?
We may be witnessing a major turning point in Silver relative to Small-Caps, and more broadly, Precious Metals relative to Equities.