Option Investor
Newsletter

Daily Newsletter, Thursday, 8/6/2015

Table of Contents

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

Market Wrap

Eyeing The Fed

by Thomas Hughes

Click here to email Thomas Hughes
Once again we're waiting on the Fed. The upcoming September meeting may be the most anticipated since they announced the taper.

Introduction

Global markets were marginally lower in today's trade as speculation over the September FOMC meeting begins to heat up. Economic data, and a fair amount of Fed Speak, has gotten the idea of a September lift-off more firmly cemented in the minds of Wall Street. We still haven't seen any truly significant increases in economic output but the slow, steady rate of growth of the past few years has brought to us to the point that a rate hike is imminent.

Asian markets were mixed. The Nikkei gained a quarter percent, Chinese indices lost a half percent or more. There were no significant headlines from the region that I saw. European indices were largely flat until the open of our markets. At that time they began to fall off but only incurred losses of -0.01% to -0.5%.

Market Statistics

Futures trading in the early hours of the morning was flat to mixed. The indices hugged the flat line with a slight bias to upside. Economic data, Challenger Job Cuts and Jobless Claims, were mixed as well but still well within trend. Earnings were also of interest. Several big names which reported yesterday were still on the minds of traders today, namely Disney, Tesla and Green Mountain Coffee, due to misses and/or poor outlook.

The market opened positive, marginally, and then immediately sold off. Initial losses were in the range of -0.25% but extended in the first hour to near -0.5% on average. These levels held until mid-day when the bottom seemed to fall out of the market. The SPX was down more than 22 points at one point but hit a target support level and bounce back, if only a little. Weakness persisted all day but all indices were able to move off of their lows before the close of trading.

Economic Calendar

The Economy

The Challenger Gray & Christmas report on planned lay-offs was released first. It shows a 136% increase in lay-off's versus last month, and 125% increase over July of last year. This month's cuts bring the YTD total to 393,368, the highest 7 month total since 2009. This month's total is the highest single month gain since 2011.

More than half of this month's gain is due to cuts by the government. More than 57,000 military and civilian work-force jobs are being cut, over the next two years. Backing this out the total comes down to 48,696 and more in line with recent trends. After that the biggest contributor is the tech sector where more than 20,000 jobs are being lost. Primarily at Microsoft (Nokia bust), Qualcom and Intel. Looking at the full year total and taking into account jobs lost to energy, 69,550, as well as the military cuts it comes down to 212,818 and below last years level. As a point of reference the energy sector only lost about 5000 jobs in 2014.


Initial claims for unemployment rose less than expected from last week's unrevised figure. Initial claims rose 3,000 to 270,000 versus the expected rise to 275,000. The four week moving average of claims fell -6,500 to 268,000 as the July data drops out of the calculation. Although there has been a slight rise in claims over the past two weeks they remain in downtrend and near long term lows. On a not adjusted basis claims fell by -2.2% versus the -3.4% projected by the seasonal factors. On a year over year basis not adjusted claims are -9.2% lower than last year at this time. Kansas and West Virginia saw the biggest increases in claims, +481 and +87, while Michigan and California saw the biggest declines in claims, -4,003 and -3,862.


Continuing claims fell by -14,000 from an upward revision of 7,000 to hit 2.255 million. The four week moving average also fell shedding -18,000. Continuing claims also remain in down trend and near its long term lows.

Total claims for unemployment gained 1,649 to reach 2.301 million. This number too has been on the rise in recent weeks but also remains in long term down trend and near its long term lows. On a year over year basis total claims are more than-10% lower than last July.


Tomorrow's jobs report is going to be a market mover any way you look at it. Based on the ADP report it could come in weaker than expected but the NFP does not always track closely with the ADP number. Not to mention the likelihood of revisions in the coming months. The Challenger report is a harbinger of potential increases in overall unemployment, but not until next month or later depending on when the jobs are actually lost. The upshot is that labor market momentum is on the rise, job openings are at high levels and the quits rate remains strong which leads me to believe that job creation is steady at the least.

What may be more important is the Labor Participation Rate, and any information about numbers of new retirees. The rate of retirement is important in relation to jobs creation in that it is opening up higher level jobs and allowing upward mobility in the work force thereby creating lower level positions in need of filling, all without creating any new jobs.

Also on tap for tomorrow is Consumer Credit, Average Work Week and Hourly Earnings.

The Oil Index

Oil prices fell more than -1.5% in today's session reaching a new 5 month low. WTI fell to near $45.50 despite a draw in stockpiles reported yesterday. The draw, due primarily to high refinery runs, did little to change the supply and demand picture which remains decidedly heavy on supply. Brent also fell, dropping below $49.50 for the first time since February. Prices are likely to remain under pressure in the near term. Short to long term prices are expected to trend above $50 for WTI in 2016.

The Oil Index gained more than 1.35% in today's action, counter to the broad market and the drop in oil prices. Today's candle is moving up from the support line I drew earlier in the week and appears to be confirming said support. The indicators are rolling into what could become a bullish signal, in line with prevailing long term trends. My line at 1175 is near term support, a break below here could take the index down to 1120, resistance should today's move result in further upside is near the 50% retracement line and short term moving average near 1235.


The Gold Index

Gold prices rebound in today's action as we wait on the jobs data. Weak ADP has led some to expect a weak NFP which reduces the chances of a September rate hike ever so slightly, putting pressure on the dollar and giving gold a boost. Gold prices have so far not broken below the recently set low near $1175 and have been trending sideways within a consolidation band for nearly 3 weeks. This may continue up to and until the next FOMC rate hike provided data does not sway expectations. However, steady to strong data may help to strengthen the dollar which would provide additional downside pressure. Inflation remains very tame and is not supporting outlook for higher gold prices down the road.

A new though I have had is this, what if the FOMC is the missing link in the inflation picture? A rise in interest rates will cause a chain reaction of higher prices that could ripple through the economy. If so the rate hike itself could weaken gold in the near term while providing the catalyst for longer term inflation and rising gold prices.

The gold miners ETF GDX gained a little over 2.0% in today's session. The ETF is moving up from the recently set all time low with momentum shifting to the upside. The ETF remains below the previous all time low and the short term moving average which are potential targets for a snap-back rally. The fund is in downtrend and tied to the price of gold.


In The News, Story Stocks and Earnings

Mondelez made the news this morning when Pershing Square's Bill Ackman announced a $5.5 billion stake. The stake is equal to 7.5% of shares and is expected to lead to action from Ackman and Pershing. Ackman is expected to “engage” with management and the board over operations and other matters. Shares of the stock opened with a +6.5% gain but sold off during the day. Prices closed near yesterday's closing level on high volume. Mondelez has recently set new all-time highs on a strong earnings report.


A number of top gold producers reported today including Randgold and Royal Gold. Both companies reported record quarters for production. Randgold says production is up 7% over last year at this time with improvements to quality of recovery. Costs have fallen by 3% and will likely continue to fall in light of plunging oil prices. The company also said that it was in position to continue investing in new projects as well as strengthen the balance sheet. Royal Gold increased revenues by 3% in the quarter and produced record cash flow, up 37%. Shares of both companies traded in similar fashion to the miners ETF GDX with indicators pointing toward higher prices. It seems as if the miners are able to perform well, and improve operations, despite the low price of gold. Low realized price will continue to be a headwind but the miners are set up for significant gains once prices stabilize. Increased production, higher realized quality and lower costs can only lead to profits...provided gold prices cooperate.


Shares of Michael Kors jumped more than 10% on better than expected earnings. The company reported earning and revenue above consensus as well as reaffirming full year guidance above current estimates. The stock had been trending lower but may now be on the move up toward possible resistance at the bottom of May window near $50. Today's move took the stock back over the short term moving average with rising bullish indicators.


A lot of today's down side can be blamed on the media sector and led by Viacom. The company reported earnings that were well below expectations and lowered guidance. The reason is rapidly declining subscriber numbers for pay TV as on-line and streaming lure more and more customers away. Viacom fell more than 20% at the lows of the day and closed with a loss of -13.5%.


The Indices

The market sold off today on weak earnings from a few big names and anticipation for the NFP release tomorrow morning. The drop was led by the NASDAQ Composite which dropped a little more than -1.6%. The index created the longest black candle in over 4 months but was halted at support. The index is now trading just above the long term trend line and the 2000 all time closing high. The indicators are bearish in the near term so a test of support could continue with the long term trend line as target. Longer term the indicators remain consistent with support along the trend line so this test appears to be setting up another buying opportunity at this time.


The Dow Jones Transportation Average made the next biggest decline, -0.83%. The index fell from resistance at the bottom of the previously broken Nov 2014- May 2015 trading range but did not fall below the short term moving average. The indicators remain weak but so far consistent with up trend following the recent bottoming pattern near the 8,000 level. Price is now within a tight range bound by two previous support/resistance lines consistent with the June consolidation. It looks like the index has reversed from the April-July short term down trend, consistent underlying longer term trends, but this may only mean sideways action. Upper resistance may be strong, near 8,600, and needs to be broken for additional upside movement.


The S&P 500 comes third in today's action, posting a loss of -0.78%. The index broke through the short term 30 day moving average but was halted near the 2080 level. The indicators are weak and pointing to potentially lower prices but there are several possibilities for support just below today's closing price. The index could fall as much as 30 points before hitting my best target, near 2050, with a chance of moving to the long term trend line if it is broken. Longer term the indicators remain consistent with support along the trend line.


The Dow Jones Industrial Average made the smallest decline but fell beneath its trend line. The blue chips lost -0.69% and also set a new 6 month low. Even with the new low prices remain within the 2015 trading range and above support targets. The indicators are pointing lower in the near term but remain consistent with support in the longer. Prices may continue to test support or move lower with downside target near 17,200.


Earnings and data are fueling market churn. The news has been a bit mixed this week but nonetheless long term trends in both are positive as are future expectations. In between now and then is the upcoming September FOMC meeting and all the speculation that goes with it. It seems more and more likely that this meeting is going to be a rate hike and that I think is ultimately what is keeping the market range bound and trading as it is.

Tomorrow could be a big day. The NFP could be as expected, weaker than expected or better than expected. I am leaning towards as expected, in the 225K range, but any number has the power to move the market. In any event one month of data does not a trend make, the economy is improving and fast approaching interest rate lift off.

Until then, remember the trend!

Thomas Hughes


New Plays

Tomorrow Morning Could Be Volatile

by James Brown

Click here to email James Brown

Editor's Note:

Investors appeared to be locking in profits ahead of tomorrow's jobs report. That does not suggest a lot of confidence in the July numbers.

A couple of days ago the ADP Employment Change report showed private payrolls missed estimates. Economists were expecting the ADP to show +215,000 new jobs. The results were only +185,000. That's down from June's +237K, the highest since December 2014.

Tomorrow's jobs report and the August report on September 4th will be two of the most watched jobs reports in recent history. That's because they're the last two nonfarm payroll numbers before the September FOMC meeting.

Analysts will be looking for any clues that suggest the Federal Reserve will raise rates in September. If the next two jobs reports are strong then odds of a September rate hike will go up, and that could spark more selling pressure for stocks. Odds of a big up day or big down day are pretty good based on the jobs number. Current estimates for the nonfarm payroll number tomorrow is +223,000 jobs.

No new trades tonight.

I was planning on adding a bearish trade on Iconix Brand Group (ICON) but after the closing bell the company announced the CEO is stepping down. Shares of ICON are trading down about $2.00 after hours (a -10% move) and I would not short the gap down at the open.




In Play Updates and Reviews

Stocks Retreat Again

by James Brown

Click here to email James Brown

Editor's Note:
There was no follow through on yesterday's market-wide bounce. A down day in Europe started the session on a bearish note. Weakness in biotechs also plagued the market. Traders seemed to be locking in profits and selling their recent winners.

AGCO hit our bullish entry trigger. GWRE hit our stop loss.


Current Portfolio:


BULLISH Play Updates

AGCO Corp. - AGCO - close: 56.24 change: +0.50

Stop Loss: 52.85
Target(s): To Be Determined
Current Gain/Loss: +0.2%
Entry on August 06 at $56.15
Listed on August 05, 2015
Time Frame: Exit PRIOR to earnings
Average Daily Volume = 1.1 million
New Positions: Yes, see below

Comments:
08/06/15: Our new play on AGCO is off to a strong start. Traders bought the dip at $55.21 and AGCO ignored the market's decline by posting a +0.9% gain. Shares rallied past potential resistance at $56.00 and hit our suggested entry point at $56.15.

Trade Description: August 5, 2015:
Wall Street has been very forgiving when it comes to AGCO's sales outlook. The company expects sales to drop -20% in 2015 from the last year. Yet investors continue to buy the dips. Even more impressive is the fact that AGCO is up +23% year to date, outperforming all of the major indices.

AGCO is in the industrial goods sector. According to the company, "AGCO is a global leader in the design, manufacture and distribution of agricultural equipment. AGCO supports more productive farming through a full line of tractors, combines, hay tools, sprayers, forage equipment, grain storage and protein production systems, seeding and tillage implements and replacement parts. AGCO products are sold through five core equipment brands, Challenger©, Fendt©, GSI©, Massey Ferguson© and Valtra© and are distributed globally through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. Founded in 1990, AGCO is headquartered in Duluth, GA, USA. In 2014, AGCO had net sales of $9.7 billion."

Looking at AGCO's recent earnings reports the company has reported sales declines the last three quarters in a row. Yet thanks to cost-cutting management has beaten analysts bottom-line earnings estimates each quarter. Management started raising their full-year 2015 earnings guidance in April with their Q1 report and boosted their earnings forecast above analysts' estimates.

They did it again when they reported their Q2 results on July 28th. Wall Street expected Q2 earnings of $1.01 per share. AGCO delivered $1.25 per share. Revenues were down -24.8% to $2.07 billion, which was in-line with expectations. The company said sales were down in every geographical region.

Martin Richenhagen, AGCO's Chairman, President and Chief Executive Officer, commented on their quarter, "Our second quarter results reflect the significant challenges caused by weaker global industry demand and currency headwinds." Yet management raised their 2015 earnings outlook again. They now expect $3.10 per share versus estimates of $2.90. They're forecasting 2015 sales in the $7.7 to $7.9 billion range.

The most recent data listed short interest at more than 18% of the 70.7 million share float. That's plenty of fuel for a short squeeze. The recent breakout past short-term resistance near $55.00 is bullish. Tonight we are suggesting a trigger to launch small bullish positions at $56.15.

*small positions to limit risk* - Suggested Positions -

Long AGCO stock @ $56.15

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

Long NOV $60 CALL (AGCO151120C60) entry $1.35

08/06/15 triggered @ $56.15
Option Format: symbol-year-month-day-call-strike


ConAgra Foods, Inc. - CAG - close: 44.97 change: +0.22

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:
08/06/15: CAG also fared well today. Shares bounced of $44.49 intraday and rallied back toward short-term resistance near $45.00. If the market rallies tomorrow I would expect CAG to breakout past this level and hit our entry trigger at $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


The Hartford Financial Services Group - HIG - close: 47.69 chg: +0.22

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

Comments:
08/06/15: HIG did not sink today. That means it gets to live for another session. If shares don't rally tomorrow then we'll probably remove it as a candidate. Currently our suggested entry point is $48.35.

Trade Description: August 3, 2015:
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)

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


The Kroger Co. - KR - close: 38.72 change: -0.36

Stop Loss: 36.95
Target(s): To Be Determined
Current Gain/Loss: -0.8%
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:
08/06/15: It was a down day for KR and technically another bearish engulfing candlestick pattern. If we widen our focus from just the last few sessions to the last few weeks it seems that KR might be stuck churning sideways in the $38.00-39.50 zone.

Monday's high was $39.40. I'd wait for a rally past this level before considering new positions.

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: 20.41 change: +0.12

Stop Loss: 19.20
Target(s): To Be Determined
Current Gain/Loss: -1.6%
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:
08/06/15: VNET managed to ignore another down day in the Chinese markets and the U.S. markets. Traders were buying the dip near round-number support at $20.00 again.

Wait for a breakout past resistance near $21.00 before considering new positions.

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

Allegheny Technologies - ATI - close: 21.55 change: +0.51

Stop Loss: 22.10
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 04, 2015
Time Frame: Exit PRIOR to September option expiration
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Comments:
08/06/15: Hmm... that's two up days in a row for ATI. If shares don't cooperate soon we'll likely remove ATI as a candidate.

At the moment our plan is unchanged. We want to launch bearish positions if ATI trades at $19.85. Keep in mind we want to use small positions to limit risk.

Trade Description: August 4, 2015:
Weak demand and cheaper competition from China has steamrolled shares of ATI down to five-year lows.

ATI is part of the industrial goods sector. According to the company, "Allegheny Technologies Incorporated is one of the largest and most diversified specialty materials and components producers in the world with revenues of approximately $4.3 billion for the twelve months ended June 30, 2015. ATI has approximately 9,600 full-time employees world-wide who use innovative technologies to offer global markets a wide range of specialty materials solutions. Our major markets are aerospace and defense, oil and gas/chemical process industry, electrical energy, medical, automotive, food equipment and appliance, and construction and mining."

ATI was already underperforming the broader market when the company issued an earnings warning on July 14th. Wall Street was estimating a profit of $0.17 per share for ATI's Q2 results. Management said they would post a loss and adjusted their Q2 guidance for a loss of (0.15) to (0.17) per share.

A few days later, on July 21st, ATI reported a Q2 loss of ($0.15) per share and the stock crashed again. Revenues fell -8.6% to $1.02 billion, which was below estimates.

ATI has two main business segments - their High Performance Materials and Components business and their Flat-rolled products business. The company said demand in Q2 was lower for both business segments with sales declines almost across the board. A slowdown in demand from the U.S. oil and gas industry hurt their high-performance unit. Meanwhile a flood of cheap imported steel from China hurt their flat-rolled product business.

Rich Harshman, Chairman, President and CEO of ATI, commented on their quarter, "This was a challenging quarter due to business conditions in the Flat Rolled Products segment and further weakening in demand from the oil & gas market in the High Performance Materials and Components segment."

These results have sparked some downgrades for ATI. The point & figure chart is very bearish and forecasting a $5.00 target. The stock's P/E has soared to 171 so it's not cheap even after a $17 drop in the last three months.

Currently ATI is hovering above major round-number support at $20.00. A breakdown here would be bad news and could signal a drop toward $15.00. Tonight we are suggesting a trigger to launch bearish positions at $19.85. I am suggesting we keep our position size small to limit risk.

Trigger @ $19.85 *small positions to limit risk*

- Suggested Positions -

Short ATI stock @ $19.85

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

Buy the SEP $20 PUT (ATI150918P20)

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


Best Buy Co., Inc. - BBY - close: 31.11 change: -0.89

Stop Loss: 33.05
Target(s): To Be Determined
Current Gain/Loss: +3.1%
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:
08/06/15: Great news! BBY has finally broken down from its recent sideways consolidation near $32.00. Shares plunged -2.78% to close at new 2015 lows.

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: 25.20 change: -0.34

Stop Loss: 26.05
Target(s): To Be Determined
Current Gain/Loss: -1.8%
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:
08/06/15: There was no follow through on yesterday's rally in MIK. Shares reversed with a -1.3% decline. However, I'm not convinced the bounce is over yet. No new positions at this time.

The level to watch is $25.80. This was previously support and now broken it should be new resistance.

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: 18.99 change: +1.29

Stop Loss: 21.25
Target(s): To Be Determined
Current Gain/Loss: +4.3%
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:
08/06/15: Crude oil fell to new relative lows today and yet traders were buying the beaten down energy stocks. WLL dipped to another low and hit $17.08 before bouncing. Shares surged +11% off its intraday low to close up +7.28%. If the bearish trend remains intact then WLL should stall and rollover near $20.00 or near its 10-dma, currently near $20.65.

No new positions at this time.

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

08/05/15 new stop @ 21.25
08/03/15 triggered @ $19.85
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Guidewire Software, Inc. - GWRE - close: 57.71 change: -1.17

Stop Loss: 57.75
Target(s): To Be Determined
Current Gain/Loss: -0.9%
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:
08/06/15: The stock market's widespread weakness this morning was too much for shares of GWRE. The stock broke down under short-term support near $58.00 and hit our stop at $57.75.

- Suggested Positions -

Long GWRE stock @ $58.25 exit $57.75 (-0.9%)

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

OCT $60 CALL (GWRE151016C60) $2.80 exit $2.l5 (-23.2%)

08/06/15 stopped out
08/04/15 Readers may want to exit early now
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

chart: