How to Profit From Silver Prices (SLW, SSRI)

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After years of getting pummeled following 2011’s parabolic spike in the precious metals sector, Silver Wheaton Corp. (USA) (NYSE:SLW) and Silver Standard Resources Inc. (USA) (NASDAQ:SSRI) find themselves in a peculiarly enviable position.

silver stocks to buy now

Last week’s announcement by the Federal Reserve Chair Janet Yellen to postpone a widely anticipated interest-rate hike until after April’s Federal Open Market Committee meeting quickly brought about inflationary expectations, as evidenced by the sharp reversal in the U.S. dollar. The commodities market quickly pounced, with silver prices jumping to nearly 8% above the opening price for March 18, the date of Yellen’s announcement.

The current dynamics suggest, at least in the near term, that silver stocks like SLW and SSRI can ride a wave of bullish optimism. However, the silver investment story — whether for the producers or the metal itself — is exceptionally volatile, which means investors should focus on an unemotional approach if they want to profit off silver prices right now.

As anyone that has Googled topics concerning the precious metals — particularly gold and silver — can attest, a litany of often dire prognostications materialize, appealing to guttural emotions: Buy gold and silver before the economy collapses! This base reasoning is exacerbated by the misuse of interpretative forecasting disciplines such as chart pattern identification.

In short, biased or emotionally aroused analysts see what they want to see.

Statistical trading models eliminate the inherent problems associated with interpretive forecasting by getting rid of the human element altogether. In its place are the pure numbers of the market. The numbers are then arranged to produce “event-based statistics” that help determine future probabilities. For instance, if a football team wins three games in a row (the event), what is the likelihood of the team winning the fourth game (probability)?

Today, we’ll help investors out by calculating a precise probability for successfully trading silver prices via SLW or SSRI, given a particular event.

Silver Wheaton (SLW)

With a market capitalization in excess of $7 billion, Silver Wheaton is the more stable of the two companies mentioned on this article. Since peaking in valuation during spring 2011, however, SLW has gyrated wildly between periods of optimism and pessimism. This fluctuation provides the movement necessary for investors to take bets and (hopefully) make money, but it also underscores the need to make calculated decisions to minimize downside risk.

Using the average weekly performance of SLW over a five-week running period as our conditional event, we want to know the odds of whether valuations over the next five weeks will be positive or negative. Performing this exercise using data from July 6, 2005, until March 20, 2015, gives us the following results:

SLW silver stock
Source: Source: JYE Financial, unless otherwise indicated

A few key takeaways?

  • SLW is a momentum stock. When the average five-week performance is positive, there is a high degree of likelihood (nearly 73%) that valuations will rise over the next five weeks, too. On the other hand, buying into weakness (when the average five-week performance is negative) has a very low profitability rate.
  • Investors can afford to be patient with SLW. As the five-week performance crosses above higher thresholds, both the probability of making a profit and the average returns of profitability increase substantially. This means an investor can wait for strong signals to confirm a bullish trend before committing capital.
  • The potential reward for “catching a falling knife” is not worth the risk. When SLW goes negative for a five-week period, there’s less than a 36% chance that valuations will turn positive five weeks later. Worse yet, buying SLW at increasingly depressed rates yields lower probabilities of a turnaround. The bottom line is to not call a bottom on this stock!

The five-week average performance from Feb. 17 and March 20 is -2.94%, which means buying SLW will yield a roughly 37% chance that the position will be profitable by April 24. But if underlying silver prices continue to improve, the average performance of SLW should rise as well, shifting the odds in your favor.

Silver Standard Resources (SSRI)

Silver Standard’s market cap of $412 million and the fact it’s operating in the red make it the more speculative investment. SSRI’s lower nominal price around $5 also makes it attractive to “bottom-dwellers,” or those looking to score big on underperforming investments. Yes, you can win big with SSRI, but it requires careful risk management.

Performing the previously mentioned statistical exercise nets the following results:

SSRI silver stock
Source: Source: JYE Financial, unless otherwise indicated

The takeaways here:

  • Like SLW, SSRI is a momentum stock. A string of positive performances more often than not results in further gains. Consecutive losses tend to signal steeper losses. Though this condition could change on a moment’s notice, it’s unwise to trade against established patterns unless there is strong evidence that playing the part of the contrarian is worth the risk.
  • From a statistical point-of-view, SSRI is slightly more volatile than SLW. This is determined by the fact that as the market gains traction, the odds of future profitability doesn’t increase as dramatically as it does for SLW. On the flip side, when SSRI’s five-week performance drops between a range of -5% to -10%, the odds of a turnaround over the next month is a paltry 18%. Therefore, knife-catching routines are especially dangerous for potential SSRI investors as the odds are stacked against such a tactic.

Overall, SSRI offers similar characteristics with SLW but at a lower upfront premium. This may be appealing for those who are simply interested in making a quick trade.

Currently, the lagging five-week performance of SSRI is -3.5%, which statistically means that there is a 39% chance of future profitability should you buy the stock now. However, the three weeks prior to the week of March 9 were particularly volatile.

The best way to improve your chances? Like with SLW, wait, and see if the underlying market in silver prices continues to improve.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2015/03/silver-prices-slw-ssri-stocks/.

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