Trade of the Day: Silver Wheaton Corp. (USA) (NYSE:SLW)

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Today, we’re recommending a bearish play on Silver Wheaton Corp. (USA) (SLW). Our reasoning with this trade is based on the yield curve — a term that describes the relationship between short-term and long-term interest rates.

When long-term rates are rising relative to short-term rates, then we would say that the yield curve is “steepening.” If short-term rates are rising relative to long-term rates, then we would call that a “flattening” yield curve. What these two scenarios tell us about investor expectations is important.

Recently, there has been a lot of talk about the Federal Reserve raising interest rates. That is likely to turn out to be correct, but the Fed is only going to move the short-term, overnight rate. Longer-term rates will move independently (mostly) from short-term rates. Over the last few weeks, as investors have been increasing expectations for a short-term rate hike, longer-term rates have been falling slightly. That “flattening” is usually seen as a lack of confidence in the economy.

If traders don’t expect a lot of growth in the near term, then they are also not likely to expect inflation or consumer interest rates to rise. That outlook is the most likely reason why the yield curve has been flattening over the last few weeks. The chart below compares the 1-year Treasury yield to the 10-year yield, which is a little simplistic, but it illustrates what is happening more broadly.

Trade of the Day: Silver Wheaton Corp. (USA) (NYSE:SLW)

Typically, the yield curve falls as the market is in decline, which is what happened in November through December of both 2015 and 2014. Both of those periods preceded corrections in the equity market, so this puts the Fed in a tough spot. Fed officials have already communicated to the market that rates are going up, and traders are continuing to anticipate a flat or falling market, which is what we can see in the yield curve.

The threat of a stronger U.S. dollar and a falling yield curve happening at the same time has been extremely difficult for traders. However, the combination has contributed to a significant amount of bearish pressure on precious metals — and that creates opportunity.

Silver Wheaton has lagged the decline in silver prices, which happened last June as well. We expect SLW to break support and head lower as the interest rate environment continues to weigh on metals. The double-whammy of SLW’s sensitivity to industrial production in China (electronics) should help increase momentum to the downside.

‘Buy to open’ the SLW July 18 Puts (SLW160715P00018000) for a maximum price of $1.00.

You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/trade-of-the-day-silver-wheaton-corp-usa-nyse-slw/.

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