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Tuesday Tumble: Silver Wheaton Corp. (USA) (SLW)

Why we think SLW is vulnerable from a contrarian perspective

by 1/14/2014 11:51:30 AM
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Every week in the Tuesday Tumble, we explore a potentially overloved stock that may be vulnerable going forward, from a contrarian perspective. This week, our choice is mining company Silver Wheaton Corp. (USA) (NYSE:SLW).

Despite 2013's bull market, SLW has managed to tumble 40% during the last 52 weeks to its current perch at $21.79. These losses weren't relegated to the early portion of 2013, either. During the most recent 60 trading days, in fact, the shares have underperformed the broader S&P 500 Index (SPX) by more than 11 percentage points. Now, the stock finds itself battling a potential level of resistance at its 80-day moving average, which last stifled an SLW rally last February.

Daily Chart of SLW since December 2012 With 80-Day Moving Average

Despite that lackluster technical data, Silver Wheaton is a bullish favorite. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the security has racked up a 10-day call/put volume ratio of 5.35, with nearly 31,000 calls bought to open versus fewer than 5,800 puts. Looking back 12 months, the current ratio ranks in the 96th percentile, meaning calls have been purchased (relative to puts) at a near-annual-high rate.

In a similar vein, Schaeffer's put/call open interest ratio (SOIR) for SLW sits at 0.57, with calls almost doubling puts among options with a shelf-life of three months or less. The SOIR is lower than 85% of comparable readings from the last year, too, meaning short-term traders have rarely been as call-focused, relatively speaking.

The sentiment picture is no different, even after moving from Main Street to Wall Street. Among the 17 firms covering SLW, an astounding 16 have given the shares a rating of "buy" or better, versus one "hold" -- with not a single "sell" or "strong sell" recommendation in sight. If that's not surprising enough, analysts' average 12-month price target for SLW registers at $29.03, roughly 33% higher than the equity's current price.

Based on all of these considerations, we believe Silver Wheaton Corp. (USA) (NYSE:SLW) is potentially set up for a fall. Should the option and brokerage bulls begin to take notice of the company's chronic technical struggles, a change of heart could ensue -- in the form of unwinding call positions and/or a round of downgrades/price-target cuts --pressuring the shares lower.

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