Option Investor
Newsletter

Daily Newsletter, Monday, 8/3/2015

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Digesting The Data

by Thomas Hughes

Click here to email Thomas Hughes
An unusually full economic calendar, plunging oil prices and global headlines gave the market pause.

Introduction

This is a big week for economic data, today included. It is once again the beginning of another month and a new round of macro-economic data. Today there were four major releases to move the market and they, along with a few global headlines, gave the market pause.

Starting in Asia data from China is adding to fear of slowing growth. PMI fell to 47.8 in July, more than the previously reported level of 48.2 and other measures of Chinese PMI. Chinese indices fell hardest, losing about -1%, the Nikkei held steady with a drop of only -0.18%.

European indices opened lower but rebound during the day. The Chinese PMI news and reopening of the Greek stock market responsible for the early loss. Shares of Greek stocks fell more than -15% while other major indices closed with gains. The DAX led with an increase over 1%.

Market Statistics

Our market was positive in the early hours of the morning. Futures trading was mildly volatile, within a tight range, but largely indicating a flat to positive opening for most of the indices. Earnings and economic data were the largest contributors to sentiment. Stocks sold off at the open, but not sharply, with losses for some indices reaching -0.5%. A mid-morning bounce had them all flirting with positive territory until a lunch time sell off sent them back down.

Afternoon saw things deteriorate, perhaps due to the sharp decline in oil prices. The indices fell to test the early lows and then set new lows. The S&P 500 was down close to -15 at one point, the Dow nearly -200. Puerto Rico was an also issue for the market to digest today. Early reports the territory had defaulted on its debt payments helped to depress the market. A late afternoon announcement it had made a partial payments helped to lift stocks off of the their lows.

Economic Calendar

The Economy

Lots of data for a Monday. Personal Income and Spending was released first. According to the Department of Economic Analysis Personal Income rose by 0.4%. This is above expectation and in line with the previous month and equal to a gain of $68.1 billion. Disposable Personal Income rose by 0.5%, spending only rose 0.2%. The only disappointment is the spending number which came in below expectations and with a downward revision to last month, 0.9% to 0.7%.

Auto sales were released by the individual auto makers throughout the day. Ford, Fiat, Toyota and GM announced before the bell, all coming in better than expected. Ford says they grew sales by 4.9%, more than double expectations, GM say they grew sales 6%, also double expectations. GM went on to say they see industry wide sales pace for July at 17.6 million, well above current expectations. Fiat also increased sales by over 6%. Toyota is the laggard at 0.6% but is still well above expectations.

Construction Spending and ISM were released at 10AM. Construction Spending rose only 0.1%, below consensus estimates for 0.4%, and the lowest level since January. The good news is that June spending was revised up from 0.8% to 1.8% and that total year on year spending is up more than 12% from June,2014.

The ISM report shows that the economy is expanding, but that expansion has slowed from last month. This month's reading of 52.7 is a decline from last month's 53.5 and the expected reading near 54. Within the report all areas measured are expanding except inventories. Inventories have slipped below the equilibrium level of 50 to 49.5. New orders and production both saw small increases while employment fell to 52.7 from 55.5.

Moody's Survey Of Business Confidence jumped 1.2% in this week's data. The diffusion index moved up to 42.2% from 41%, the fourth week of gains and the highest level in over 5. Despite the dip in sentiment over the past month it still trending near record highs and according to Mr. Zandi's analysis confidence remains strong and stable. He uses words like robust, healthy and ample when describing sales, hiring and credit.

There is a lot of data out this week. Tomorrow is relatively light, only Factory Orders, but Wednesday things heat up. ADP and ISM Services Index are followed on Thursday by Challenger Job Cuts and Initial Claims. Friday rounds out the week with Consumer Credit, Non Farm Payrolls and Unemployment numbers. Look for jobs creation to remain steady with a possible fall in overall unemployment.


According to data from Factset the blended rate for S&P 500 earnings growth improved a full percent over the last week. This is because 9/10 of the sectors are beating earnings estimates, led by the healthcare sector. So far 354 companies have reported earnings, 73% of which have beaten EPS estimates. Only 52% have beaten on the revenue side of the line. This week there are another 92 S&P companies scheduled to report so expect another increase in the blended rate next week.

On a sector by sector basis healthcare is doing best. The sector was projected to grow earnings by 7.6% at the beginning of the reporting period and has just about doubled expectations. The only sector not beating expectations is the industrials. Energy continues to lag with year over year declines of -57% but is 3% better than expected. Looking at earnings ex-energy things are looking even better. The blended rate jumps to 5.36% and near the upper end of my projections.

The Oil Index

Oil prices are falling and lost another -3.75% in today's action. The sell off gained momentum in late day trading and may have been what led the broader equities market lower. WTI fell to $45.25, Brent dropped below $50, both driven by overwhelming supply and production with little to no expected increase in demand. Today's data from China only helps to increase doubts about demand. Oil prices could fall to $43 or lower for WTI.

The Oil Index traded lower today It fell more than -1.9% but has not reached a new low. It is still a little off of the recently set long term low with mixed indicators. Momentum is shifting back to the bear side but so far has not been overly strong. The indicators, relative to the long term trend line(broken in early July), remain consistent with support. It looks like prices will test support at least, target near 1,170. Earnings outlook for 2016 is still positive so I am still looking for a bounce to form, but if prices for oil remain low this outlook could rapidly change.


The Gold Index

Gold prices fell about -0.75% in today's session on stronger dollar. Economic data remains positive and in-line with FOMC rate hike time lines and likely to keep pressure on the metal. Inflation remains a concern for me but is so far low to non-existant and adding little support. A break below current levels could take it down to $1150 with quickness.

The gold miners are moving. The miners ETF GDX hit a new closing low today, dropping -3.5%. Despite the drop today's action is still within the three week congestion band, stochastic is oversold and momentum is shifting back towards bullishness. This does not mean that the recent down trend is over but a better entry point for bearish positions may be forthcoming. A move to $15.75 would bring price back to the short term moving average and the recently broken retracement level as well as closing the gap formed when prices broke that gap. However, if gold prices continue to fall then the miners are likely to fall with them.


In The News, Story Stocks and Earnings

Noble Energy reported before the bell. The company reported a net loss that when adjusted beat expectations. The company says production is up and should grow through the end of the year, causing them to raise full year volume guidance. The company is moving forward with recent plays in the Eagleford and Delaware Basin that should help to keep oil prices low for the foreseeable future. Shares of the stock lost -3.7% in today's session.


Tyson Foods reported before the bell and did not please investors. The company reported earnings of $0.83, up from the previous quarter but well below consensus of $0.93. The company also lowered its full year guidance. Results were blamed primarily on beef markets where the company is experiencing export issues as well as higher costs. Chicken and pork are both experiencing headwinds but not to the extent as beef. Shares of the stock fell more than -9% in early trading and created a long legged doji around the $40 level.


Clorox gave a mixed report. Both earnings and sales beat estimates but full year guidance was a little short. Results were driven by increases in sales, volumes and margins. 2016 guidance is calling for only 1% growth due to currency conversions (3-4% constant currency) with a 25 basis point increase in margins. Shares of the stock responded well despite weak guidance, climbing more than 2.7% after initially opening lower.


AIG reported after the bell and barely moved the stock. The company reported $1.39 per share, beating expectations for revenue and earnings. Execs also announced a $5 billion stock buy back plan and increase to the regular dividend by 124%. Shares of the once bailed-out company lost ground in after hour trading, falling about -0.20% after trading marginally higher in the open session.


The Indices

Today's action was a little wild but not crazy. Data and earnings helped to support the market but the day's trading was focused on bad news. Indices closed mostly lower, after poking into positive territory early in the day, but not all of them. The Dow Jones Transportation Average was the one major to eke out a gain, climbing 0.30%. Falling oil prices has increased optimism in the sector and sparked another round of upgrades for the airlines and other sectors who rely on fuel as a primary cost of business. The index created a small bodied candle, the third spinning top since bouncing from the long term low last week, and is accompanied by increasing momentum. The index appears to be moving higher with sights set on resistance at the 8600 level.


Today's biggest decliner was the Dow Jones Industrial Average which fell a little over -0.5%. The blue chips fell from resistance with bearish indications but bounced from support at the long term trend line, near 17,500. The indicators are pointing lower at this time so further testing of support along the trend line could come. The indicators also remain consistent with long term support, along the trend line, so any test or break is likely to result in buying opportunities. This level is also consistent with the recent lows For now, the index is trapped between support and resistance waiting to break out.


The broad market S&P 500 made the next biggest decline, -0.28%. The index is trading above the short term moving average and test support at the average in today's action. This support is consistent with previous support bounces near the 2,100 level. The indicators are mixed but setting up for a potential trend following signal; MACD has turned positive with today's candle, stochastic is pointing lower but trending higher and on the cusp of a bullish crossover. Potential resistance is just above the current level, about 20-30 points higher, and needs to be broken for more significant upside movements. If resistance is not broken the index could remain within the recent range between 2050 and 2020.


The NASDAQ Composite made the smallest decline in today's session falling -0.25%. The tech heavy index is in mid-bounce and tested support along the short term average. The indicators remain weak and suggest further testing of support could come but the trend remains up. A fall below the moving average could take the index to support along the long term trend line near 5,000. A move up would find resistance at the all time high near 5218.


Today's action was a little wild, primarily driven on news. Near term fears helped to drive stocks lower, economic and earnings trends helped to provide support. China, Greece and Puerto Rico all played a part, including President Obama and his new Clean Air Plan. The plan allows the EPA to regulate carbon emissions under the Clean Air Act and will require each state to develop its own schedule for reducing emissions.

The market faces potential headwinds this week, on top of declining oil prices. Falling oil prices could help the market move lower as energy stocks get hammered but are a bonus for all other sectors longer term. Other headwinds include economic data and earnings. The data needs to remain in the Goldilocks range, showing growth without inflation, and growth without so much strength it forces the FOMC into more than what the market is expecting. Earnings need to remain better than expected, with positive forward outlook.

The indices appear to be moving higher but August is notoriously a tepid month for stocks so I am cautious. It is important to remember that although it is the end of the summer but market volumes usually remain low until after Labor Day leaving the market highly susceptible to daily news events. This alone is reason enough to keep the market bouncing between support and resistance, when you add in earnings season, economic data, FOMC anticipation, China and Greece the chances of range bound trading increase.

Until then, remember the trend!

Thomas Hughes


New Plays

Takeover Candidate

by James Brown

Click here to email James Brown


NEW BULLISH Plays

The Hartford Financial Services Group - HIG - close: 48.23 chg: +0.68

Stop Loss: 46.40
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 03, 2015
Time Frame: Exit PRIOR to September option expiration
Average Daily Volume = 3.0 million
New Positions: Yes, see below

Company Description

Trade Description:
HIG had been hovering near multi-year highs from March through June this year. Then in July the stock began to accelerate higher. The catalyst was merger and acquisition news in its industry.

On July 1st ACE Limited (ACE) announced it would buy Chubb Corp. (CB) for $28.3 billion. This lit a fire under the property and casualty insurance stocks and HIG surged to new highs for the year.

If you're familiar with HIG they are in the financial sector. According to the company, "With more than 200 years of expertise, The Hartford (HIG) is a leader in property and casualty insurance, group benefits and mutual funds. The company is widely recognized for its service excellence, sustainability practices, trust and integrity."

The last couple of earnings reports for HIG have been mixed. They have been beating Wall Street's bottom line estimate but have missed the revenue numbers. Their most recent report was July 27th. Analysts were expecting a profit of $0.77 per share. HIG crushed the number with a profit of $0.91 per share. That is a +193% improvement from the $0.31 profit a year ago. Revenues were up +1.5% to $4.68 billion.

In addition to beating the estimate HIG raised its dividend and boosted its stock buyback program by an additional $1.6 billion. The current repurchase program stands at $2 billion through December 31, 2016.

Shares have garnered a couple of price target upgrades since its earnings report. The new targets are $53 and $55. There has been more chatter and speculation that HIG is a potential takeover target, which is probably why shares are outperforming its peers. The S&P SPDR Insurance ETF is up +7.8% year to date while HIG is up +15.6%.

Tonight we are suggesting small bullish positions if HIG can trade at $48.35 or higher.

Trigger @ $48.35 *small positions to limit risk*

- Suggested Positions -

Buy HIG stock @ $48.35

- (or for more adventurous traders, try this option) -

Buy the SEP $50 CALL (HIG150918C50) current ask $0.97
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:



In Play Updates and Reviews

Oil Weakness Sinks Energy Stocks

by James Brown

Click here to email James Brown

Editor's Note:
Another down day for crude oil fueled a big decline among the energy stocks on Monday. The rest of the market didn't fare that well either but the major indices were able to pare some of their losses by the closing bell.

ADSK hit our stop loss. WLL hit our entry trigger.


Current Portfolio:


BULLISH Play Updates

ConAgra Foods, Inc. - CAG - close: 44.07 change: +0.01

Stop Loss: 43.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on July -- at $---.--
Listed on July 30, 2015
Time Frame: Exit PRIOR to earnings on September 22nd,
Average Daily Volume = 3.3 million
New Positions: Yes, see below

Comments:
08/03/15: CAG managed to ignore the market's widespread weakness today. Shares drifted sideways and closed virtually unchanged. Our suggested entry point is $45.25.

Trade Description: July 30, 2015:
Two years ago CAG spent $5 billion to buy private-label food maker Ralcorp. At the time, CAG called it a "transformational" deal. Unfortunately their private-label business has been nothing but a money pit.

CAG is in the consumer goods sector. According to the company, "ConAgra Foods, Inc., (CAG), is one of North America's leading food companies, with brands in 99 percent of America’s households. Consumers find Banquet, Chef Boyardee, Egg Beaters, Hebrew National, Hunt's, Marie Callender's, Orville Redenbacher's, PAM, Peter Pan, Reddi-wip, Slim Jim, Snack Pack and many other ConAgra Foods brands in grocery, convenience, mass merchandise and club stores. ConAgra Foods also has a strong business-to-business presence, supplying frozen potato and sweet potato products as well as other vegetable, spice and grain products to a variety of well-known restaurants, foodservice operators and commercial customers."

In spite of CAG's troubles with its private-label business the stock was trading at multi-year highs in mid June this year. Then on June 19th the stock soared more than +10%. Shares were already flirting with its all-time highs from the late 1990s in the $38-39 area. They vaulted higher when activist hedge fund JANA Partners announced they had amassed a 7.2% stake in CAG. JANA argued that CAG was undervalued and not doing enough to build shareholder value.

It would appear that CAG's management has embraced JANA's involvement and direction. They have already appointed two of JANA's nominees to the Board of Directors. When CAG reported its Q4 earnings on June 30th they announced they would exit the private-label business.

The private-label business, Ralcorp, makes stuff like cereal, pasta, crackers, jams, jellies, syrups, and frozen waffles. They currently account for about 25% of CAG's sales but they're also the only business segment that lost money last quarter.

Multiple companies, including TreeHouse Foods (THS) and Post Holdings (POST), are said to be bidding for the private-label business. Estimates suggest it could sell for $3.5 billion. That's a big drop from the $5 billion price tag CAG paid.

Shares of CAG saw a two-week correction from its early July highs but traders have started to buy the stock again and recently broke the short-term trend of lower highs. We suspect this activist-investor fueled rally in CAG has further to run. Often activist investors urge companies to break up to unlock shareholder value or push for a company to sell itself. We'll have to see what the next move is. Today's high was $44.51. We are suggesting a trigger to launch bullish positions at $45.25.

Trigger @ $45.25

- Suggested Positions -

Buy CAG stock @ $45.25

- (or for more adventurous traders, try this option) -

Buy the SEP $45 CALL (CAG150918C45)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike


Guidewire Software, Inc. - GWRE - close: 58.49 change: -0.56

Stop Loss: 57.75
Target(s): To Be Determined
Current Gain/Loss: +0.4%
Entry on July 23 at $58.25
Listed on July 21, 2015
Time Frame: Exit PRIOR to earnings on Sept. 1st
Average Daily Volume = 368 thousand
New Positions: see below

Comments:
08/03/15: Uh-oh! GWRE underperformed the broader market with a -0.9% decline. Shares managed to bounce from support near $58.00 but the rebound didn't get very far.

No new positions at this time!

Trade Description: July 21, 2015:
The NASDAQ composite is up +10% year to date. GWRE is outperforming with a +13.3% gain. Shares spent three months, March-May, consolidating lower after the rally failed at resistance near $55.00. GWRE's direction changed after its latest earnings report.

GWRE is in the technology sector. According to the company, "Guidewire builds software products that help Property/Casualty insurers replace their legacy core systems and transform their business. Designed to be flexible and scalable, Guidewire products enable insurers to deliver excellent service, increase market share and lower operating costs. Guidewire InsuranceSuite provides the core systems used by insurers as operational systems of record. Additional products provide support for data management, business intelligence, anytime/anywhere access and guidance and monitoring. More than 180 Property/Casualty insurers around the world have selected Guidewire."

Last December GWRE reported its fiscal Q1 results that beat Wall Street estimates on both the top and bottom line. Management raised their Q2 guidance. On March 2nd GWRE reported earnings and revenues that beat analysts' estimates again. GWRE management then raised their fiscal year 2015 estimates. This earnings beat was not enough to lift the stock higher. Shares drifted lower for three months.

Shares of GWRE came alive again following its Q3 report on June 2nd. Earnings actually missed estimates by a penny with a profit of $0.04 per share. Revenues were only up +4% to $85.4 million, although that did beat expectations. The company provided lackluster Q4 guidance but guided for +20% revenue growth in fiscal 2016. The stock soared.

The rally off its June lows has pushed GWRE through multiple layers of resistance. Now the stock is setting new all-time closing highs. The point & figure chart is bullish and forecasting a long-term target of $80.00.

On a very short-term basis the $58.00 level appears to be resistance. We are suggesting a trigger to launch bullish positions at $58.25.

- Suggested Positions -

Long GWRE stock @ $58.25

- (or for more adventurous traders, try this option) -

Long OCT $60 CALL (GWRE151016C60) $2.80

08/01/15 new stop @ 57.75
07/25/15 new stop @ 56.90
07/23/15 new stop @ 56.40
07/23/15 triggered @ $58.25
Option Format: symbol-year-month-day-call-strike


The Kroger Co. - KR - close: 39.40 change: +0.16

Stop Loss: 36.95
Target(s): To Be Determined
Current Gain/Loss: +0.9%
Entry on July 30 at $39.05
Listed on July 28, 2015
Time Frame: Exit PRIOR to earnings on Sept. 11th
Average Daily Volume = 3.9 million
New Positions: see below

Comments:
08/03/15: Shares of KR seemed oblivious to the market's weakness today. The stock spent most of the session consolidating sideways before a late-day rally lifted it to new highs. This looks like a new bullish entry point.

Trade Description: July 28, 2015:
If you're looking for a company with consistent growth then look no further. KR appears to be the king of same-store sales and recently announced 46 quarters of consecutive same-store sales growth.

KR is in the services sector. According to the company, "Kroger, one of the world's largest retailers, employs nearly 400,000 associates who serve customers in 2,626 supermarkets and multi-department stores in 34 states and the District of Columbia under two dozen local banner names including Kroger, City Market, Dillons, Food 4 Less, Fred Meyer, Fry's, Harris Teeter, Jay C, King Soopers, QFC, Ralphs and Smith's. The company also operates 780 convenience stores, 327 fine jewelry stores, 1,342 supermarket fuel centers and 37 food processing plants in the U.S."

BusinessInsider ran an interesting article on KR that suggested the grocery chain is shaping up to be growing competition for the fast-food industry. A recent poll showed that 1 out of 4 consumers would choose Kroger instead of McDonald's. KR has become more attractive because they have been expanding their prepared-food selection.

Another interesting tidbit came from CNBC Mad Money's Jim Cramer who said KR has twice the growth of rival Whole Foods Market (WFM). KR's most recent quarterly results showed same-store sales growth of +5.7%, which easily outpaces its rivals.

Speaking of Whole Foods, KR is quickly catching up. WFM built its brand on organic and natural foods, which also happen to have better margins than traditional grocery items. Rivals took notice and KR jumped into organics with both feet. According to JPMorgan, KR is on track to surpass WFM as the biggest seller of organic foods within the next two years. (FYI: Costco actually sells more organic food than anyone else in the U.S. but they are not a traditional grocery story).

KR's most recent earnings report was June 18th. It was their 2016 Q1 report with earnings of $1.25 per share. That beat estimates of $1.22. Revenues were $33.05 billion, which actually missed estimates. The stock rallied anyway. KR management reaffirmed their fiscal year 2016 earnings forecast for $3.80-3.90 per share (essentially +10% growth).

Traders should like this stock since KR is very shareholder friendly. According to a company press release they have returned more than $1.1 billion to shareholders through share buybacks and dividends in the last four quarters. Management recently announced a new $500 million stock buy back program to replace their previous repurchase program, which had been exhausted. They also raised their dividend. On a post-split basis will pay 10.5 cents on per share on September 1st, 2015. KR should begin trading ex-dividend August 12th Speaking of splits, the stock just split 2-for-1 on July 13th. It was their fifth stock split since 1979.

Last week the U.S. stock market was plunging. KR managed to evade most of the damage and essentially traded down from $39.30 to $38.30. Shares did see a spike down on Monday this week but traders bought the dip . We think KR is poised to breakout to new all-time highs soon. Tonight we're suggesting a trigger to open bullish positions at $39.05. More conservative investors might want to actually wait for a new high and use a trigger at $39.40 instead.

- Suggested Positions -

Long KR stock @ $39.05

- (or for more adventurous traders, try this option) -

Long SEP $40 CALL (KR150918C40) entry $0.74

07/30/15 triggered @ $39.05
Option Format: symbol-year-month-day-call-strike


21Vianet Group, Inc. - VNET - close: 20.04 change: -0.22

Stop Loss: 19.20
Target(s): To Be Determined
Current Gain/Loss: -3.4%
Entry on July 23 at $20.75
Listed on July 22, 2015
Time Frame: Exit PRIOR to earnings on August 25th
Average Daily Volume = 996 thousand
New Positions: see below

Comments:
08/03/15: Asian markets were down across the board today. VNET gapped open lower and bounced but gains quickly faded. Shares spent today hovering near round-number support at $20.00 and technical support at its simple 50-dma.

No new positions at this time.

Trade Description: July 22, 2015:
Buckle your seatbelt. We are adding a fast-moving Chinese Internet stock to the play list tonight. This trade is not for the faint of heart. The Chinese market has been very volatile in recent weeks. This has been exacerbated by merger and acquisition news.

VNET is in the technology sector. According to the company, "21Vianet Group, Inc. is a leading carrier-neutral internet data center services provider in China. 21Vianet provides hosting and related services, managed network services, cloud services, content delivery network services, last-mile wired broadband services and business VPN services, improving the reliability, security and speed of its customers' internet infrastructure. Customers may locate their servers and networking equipment in 21Vianet's data centers and connect to China's internet backbone through 21Vianet's extensive fiber optic network. In addition, 21Vianet's proprietary smart routing technology enables customers' data to be delivered across the internet in a faster and more reliable manner. 21Vianet operates in more than 30 cities throughout China, servicing a diversified and loyal base of more than 2,000 customers that span numerous industries ranging from internet companies to government entities and blue-chip enterprises to small- to mid-sized enterprises."

The Wall Street Journal recently noted in June that seven U.S.-listed Chinese companies had been approached with offers to go private. That's a big spike in buyout offers. From January through May this year there had only been five such offers. One of the companies recently approached is VNET.

On June 10th VNET was approached with a preliminary non-binding proposal by Kingsoft Corp. and Tsinghua Unigroup International to go private for $23.00 per American depositary share ("ADSs"). That's the stock we can trade on the NASDAQ. Naturally the stock surged on this announcement. On June 16th VNET announced they had formed a special committee to review this proposal.

Unfortunately for shares of VNET and most Chinese stocks the Shanghai market in China had peaked in mid June and began to crash. The next three weeks saw a -30% plunge in the Shanghai market. The sell-off really accelerated in the first week of July. We can see the impact this market plunge was having on VNET with the big declines in early July.

Shares of VNET produced a huge bounce on July 9th when they announced the company had hired financial advisors and legal counsel to help them review the proposal to go private. In their press release they warned investors that "no decision has been made" nor is there any assurance that any "definitive offer will be made". This warning didn't stop the rally in VNET's stock which has continued to rise.

The Chinese government has thrown billions of dollars at their market to stop the crash and it seems to be working. The fever seems to have broken and this should provide a less dangerous environment for shares of VNET to trade in. We suspect VNET will continue to rally as the M&A talk heats up. However, this is an aggressive, higher-risk trade. There is no guarantee of a deal. Shares of VNET are clearly very volatile. I suggest small positions to limit risk.

NOTE: VNET does have options but the spreads are too wide to trade them.

*small positions to limit risk* - Suggested Positions -

Long VNET stock @ $20.75

08/01/15 new stop @ 19.20
07/27/15 The Chinese Shanghai index plunged -8.48%
07/23/15 triggered @ $20.75




BEARISH Play Updates

Best Buy Co., Inc. - BBY - close: 31.97 change: -0.32

Stop Loss: 33.05
Target(s): To Be Determined
Current Gain/Loss: +0.4%
Entry on July 27 at $32.10
Listed on July 25, 2015
Time Frame: Exit PRIOR to earnings in late August
Average Daily Volume = 4.3 million
New Positions: see below

Comments:
08/03/15: It looks like BBY is about to resume its prior downtrend. Last week shares were stuck consolidating sideways near the $32.00 level. Today BBY's attempt at a bounce failed at the 10-dma and shares underperformed with a -0.99% decline.

Trade Description: July 25, 2015:
Tonight's candidate is almost 50 years old. They were founded under the name "Sound of Music" but changed their name to "Best Buy" in 1983. Today they have over 1,400 locations, employ more than 125,000 people, and generate more than $40 billion in sales annually.

BBY is part of the services sector. According to the company, "Best Buy is a leading provider of technology products, services and solutions. The company offers expert service at an unbeatable price more than 1.5 billion times a year to the consumers, small business owners and educators who visit our stores, engage with Geek Squad Agents or use BestBuy.com or the Best Buy app. The company has operations in the U.S. where more than 70 percent of the population lives within 15 minutes of a Best Buy store, as well as in Canada and Mexico, where Best Buy has a physical and online presence."

The company launched a massive turnaround campaign almost three years ago as they struggled with extremely tough competition from companies like Amazon.com. The biggest problem for BBY is something called "showrooming". This is when customers come into a Best Buy store, they look around at products, ask questions from Best Buy staff, and they compare quality and price. Then they go home and buy what they want online for a cheaper price and have it delivered to their door.

BBY is acutely aware of the showrooming phenomenon. It's hard to compete with someone like Amazon who doesn't have the big overhead for large retail locations. BBY has been trying to compete on service plus they have redesigned their own online e-commerce offerings and they are seeing growth in their own online sales. BBY management has also been slashing expenses.

The turnaround has worked to a point. BBY's focus on cutting expenses is obviously good for profits. Yet sales remain slow. Looking at BBY's last couple of earnings reports their bottom line results have beaten Wall Street estimates (thanks to slashing costs) but revenues have been disappointing.

BBY reported their Q4 results on March 3rd, 2015 and revenues were only up +1.3% to $14.2 billion, which missed expectations. Comparable store sales were only up +1.3%.

BBY's Q1 result was worse. This report was announced on May 21st. They beat the bottom line EPS estimate again but revenues fell -0.9% to $8.56 billion. On the plus side their comparable store sales improved from -1.3% a year ago to +0.6% but this too was disappointing.

Shares of BBY have been in a down trend since they peaked near $42.00 in March this year. The stock has been in a bearish pattern of lower highs and lower lows. It looked like BBY might break this trend and then the stock was downgraded on July 17th.

Bank of America analyst Denise Chai reduced her rating on BBY to the equivalent of a "sell". She believes the company will see a tough second half to 2015. There is no must have product or upgrade cycle to drive customers into the store later this year. Chai expects BBY's sales to turn negative (-1%) in the second half.

BBY's stock collapsed on this downgrade and has been unable to recover. Today shares are poised to breakdown to new 2015 lows. Tonight we are suggesting a trigger to launch bearish positions at $32.15.

FYI: I am listing the October put options. BBY does have September options but the option strikes are at odd prices thanks to a $0.51 special dividend BBY paid in March and the option markets haven't caught up with new (normal) strikes yet.

I also want to point out that the point & figure chart is currently bullish for BBY. If shares traded below $32.00 it should generate a new sell signal.

- Suggested Positions -

Short BBY stock @ $32.15

- (or for more adventurous traders, try this option) -

Long OCT $30 PUT (BBY151016P30) entry $1.28

08/01/15 new stop @ 33.05
07/27/15 triggered on gap down at $32.10, trigger was $32.15
Option Format: symbol-year-month-day-call-strike


The Michaels Companies, Inc. - MIK - close: 24.74 change: -0.60

Stop Loss: 26.05
Target(s): To Be Determined
Current Gain/Loss: -0.0%
Entry on July 28 at $24.75
Listed on July 27, 2015
Time Frame: Exit PRIOR to earnings in late August
Average Daily Volume = 729 thousand
New Positions: see below

Comments:
08/03/15: Good news! The oversold bounce in MIK appears to be over. Shares reversed near technical resistance at its 10-dma and 200-dma. The stock displayed relative weakness today with a -2.3% decline.

Traders may want to look for a new decline under $24.60 as an entry point.

Trade Description: July 27, 2015:
It looks like investor sentiment on MIK has turned bearish. The stock produced big gains from its post-IPO lows near $15 in August 2014. The rally peaked in March this year near $30.00 after the company reported earnings.

If you're not familiar with MIK they are in the services sector. They're considered part of the specialty retail industry. According to the company, "The Michaels Companies, Inc. is North America's largest specialty retailer of arts and crafts (based on store count). As of May 2, 2015, the Company owns and operates 1,177 Michaels stores in 49 states and Canada and 118 Aaron Brothers stores, and produces 12 exclusive private brands including Recollections(R), Studio Decor(R), Bead Landing(R), Creatology(R), Ashland(R), Celebrate It(R), ArtMinds(R), Artist's Loft(R), Craft Smart(R), Loops & Threads(R), Imagin8(R) and Make Market(tm)."

The last couple of earnings reports have not been that exciting. MIK reported its 2015 Q4 results on March 19th. They beat estimates by a penny while revenues rose +3.4% to $1.6 billion, which was in-line with estimates. Unfortunately, MIK management lowered their guidance for Q1 and fiscal year 2016.

Even after lowering guidance MIK still missed estimates when they reported their Q1 results on June 4th. Earnings of $0.32 a share missed by a penny. Revenues were up +2.9% to $1.08 billion, which was in-line with estimates. Comparable store sales were up only +0.3%.

Looking at MIK's daily chart you can see that traders have been selling the rallies. Now MIK has a bearish pattern of lower highs. It recently broke down under support in the $26.00 area. Now MIK is testing round-number psychological support at $25.00 and technical support at its simple 200-dma. A breakdown here would definitely look bearish. Tonight we are suggesting a trigger to launch bearish positions at $24.75.

- Suggested Positions -

Short MIK stock @ $24.75

- (or for more adventurous traders, try this option) -

Long SEP $25 PUT (MIK150918P25) entry $1.45

08/01/15 new stop @ 26.05
07/28/15 triggered @ $24.75
Option Format: symbol-year-month-day-call-strike


Whiting Petroleum - WLL - close: 29.05 change: -1.44

Stop Loss: 22.55
Target(s): To Be Determined
Current Gain/Loss: +4.0%
Entry on August 03 at $19.85
Listed on August 01, 2015
Time Frame: Exit PRIOR to earnings
Average Daily Volume = 7.1 million
New Positions: see below

Comments:
08/03/15: Our brand new bearish play on WLL is off to a great start. Crude oil continued to sink today and that pushed energy stocks lower. WLL gapped down at $20.25 and then plunged to a -7.0% decline. Our trigger to open bearish positions was hit at $19.85.

Trade Description: August 1st, 2015:
The price of crude oil has fallen more than 50% in the last year. It's wreaking havoc on energy company earnings and revenues. Unfortunately the outlook is not very bullish. The global economy is stalling. China, the biggest buyer of commodities, is growing at multi-year lows. The U.S. is creeping along at +2% GDP growth while oil inventories in the U.S are near 80-year highs.

The Middle East OPEC cartel is pumping a high-volume of oil, regardless of price declines, to maintain market share. A recent report showed that OPEC boosted production by +140,000 barrels a day in July from its June production. OPEC is hoping to pressure the U.S. fracking industry out of business but it's not working. U.S. production remains resilient and near record highs.

If that wasn't enough the Federal Reserve is desperate to raise interest rates and would like to raise in September. Rising interest rates usually boost a country's currency. If the Fed does raise rates the U.S. dollar should rally even further. A rising dollar puts downward pressure on commodity prices. This paints a bearish picture for crude oil prices.

Given this outlook for crude we're adding a bearish play in the energy industry. Some view WLL as a barometer of the U.S. shale oil and gas industry. If that's the case the stock price is suggesting a dire forecast.

WLL is in the basic materials sector. According to the company, "Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company that explores for, develops, acquires and produces crude oil, natural gas and natural gas liquids primarily in the Rocky Mountain and Permian Basin regions of the United States. The Company’s largest projects are in the Bakken and Three Forks plays in North Dakota, the Niobrara play in northeast Colorado and its Enhanced Oil Recovery field in Texas."

WLL just reported its Q2 earnings on July 29th. Analysts were only expecting a profit of $0.02 per share. WLL delivered $0.04. However, that's a -97% drop from a year ago. Revenues plunged -29.4% to $590 million, which was significantly below analysts' estimates of $677 million.

We have to give the company credit for cutting costs dramatically during a tough time in the oil industry. Otherwise they would not have managed a profit for the quarter. WLL also managed to set a new company record for production of 170,000 barrels a day in the second quarter. Unfortunately, these positives are not enough to outweigh the overall bearish impact of plunging oil prices.

Plus, investors and analysts might shun WLL as the company is sending mixed messages. The company claimed that based on strong results during the second quarter they were raising their capex budget from $2 billion to $2.3 billion. That was two weeks ago. This past week WLL has already cut its capex budget. Now they're forecasting $2.15 billion. They only plan on running eight drilling rigs in the second half of 2015 instead of their previous guidance of 11 rigs.

Wall Street is turning more cautious on WLL. The stock has seen several downgrades and lowered price targets recently. The stock has been very weak. Momentum is bearish. The oversold bounce last week just failed under technical resistance at its simple 10-dma. Now WLL is testing round-number resistance at $20.00. We are suggesting a trigger to launch bearish positions at $19.85.

- Suggested Positions -

Short WLL stock @ $19.85

- (or for more adventurous traders, try this option) -

Long SEP $20 PUT (WLL150918P20) entry $2.05

08/03/15 triggered @ $19.85
Option Format: symbol-year-month-day-call-strike



CLOSED BEARISH PLAYS

Autodesk, Inc. - ADSK - close: 53.30 change: +2.72

Stop Loss: 52.55
Target(s): To Be Determined
Current Gain/Loss: -6.5%
Entry on July 30 at $49.75
Listed on July 29, 2015
Time Frame: Exit PRIOR to earnings on August 27th (unconfirmed)
Average Daily Volume = 2.3 million
New Positions: see below

Comments:
08/03/15: Bullish analyst comments on ADSK, essentially an upgrade, sparked a big move higher in the stock this morning. Shares gapped open at $52.99, plunged back to $51.75, and then rebounded to close above its 50-dma. Our stop was $52.55 so the gap open closed this trade.

- Suggested Positions -

Short ADSK stock @ $49.75 exit $52.99 (-6.5%)

- (or for more adventurous traders, try this option) -

SEP $45 PUT (ADSK150918P45) entry $0.80 exit $0.30 (-62.5%)

08/03/15 stopped out on gap open at $52.99
07/30/15 triggered @ $49.75
Option Format: symbol-year-month-day-call-strike

chart: