Option Investor

Daily Newsletter, Saturday, 8/8/2015

Table of Contents

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

Market Wrap

American Express, Too Little, Too Late

by Jim Brown

Click here to email Jim Brown

American Express (AXP) came close to rescuing the Dow from a losing streak of seven consecutive days but could not beat the clock. Late day news about an activist shareholder prompted a $5 gain in AXP worth 36 Dow points but it was not enough to lift the index back into positive territory.

Market Statistics

Around 1:PM Bloomberg broke the story that activist firm ValueAct Capital Management had amassed a 13 million share stake worth about $1 billion. AXP has a market cap of $80 billion so ValueAct has a hard road ahead to really influence the company's direction. To put this in perspective there are more than 15 stockholders that own more than 10 million shares. Berkshire Hathaway owns 151 million and Vangard 52 million. More than 85% of the shares are held by institutions and mutual funds. The $5 spike on Friday was probably overdone.

ValueAct said it had held discussions with AXP and the credit card company said it always welcomes suggestions from investors. ValueAct manages about $18 billion and targets companies that it views as temporarily mispriced.

The economic numbers on Friday weighed on the market as the potential for a September rate hike increased.

The Nonfarm Payrolls did something very unusual. The headline number came in exactly as expected at +215,000 new jobs. That number had jumped around over the last week but settled at 215,000 after the disappointing ADP Employment report on Wednesday.

The headline number declined from 260K in May and 231K in June. Those numbers were revised higher by a minor amount totaling +14,000 jobs.

The managed unemployment rate was steady at 5.3%. The broader U6 measure of unemployment declined slightly from 10.5% to 10.4% or 26.1 million workers. The number of part time workers unable to find full time work declined from 6.5 million to 6.35 million. Those not in the labor force rose by 144,000 to a record high at 93.77 million or 62.6%, which is a 38-year low. At the beginning of 2008 that number was 80 million. The labor force rose by 69,999 to 250.876 million. The separate Household Survey showed a gain of +101,000 jobs.

The average hourly earnings rose +0.2% (+5 cents) after no gain in June. The average workweek rose by a miniscule 0.1 to 34.6 hours.

Private payrolls increased +193,000 jobs. The healthcare/education sector added +37,000, business services +40,000, leisure/hospitality added +30,000 and government jobs rose +5,000.

Lackluster wage growth is a factor of too many people out of work. With 26.1 million people unemployed or underemployed there are too many applicants for any available job and employers do not have to offer higher wages to attract candidates. Without wage growth, those working will not be increasing spending and those 26.1 million under/unemployed are living on government payments of some sort or family support and that limits their spending. Until wages rise, inflation will not increase materially due to slow consumption. Analysts do not expect wage growth to accelerate until mid 2016.

The payroll number was what normally would be called a Goldilocks number but that was the problem. It was not strong enough to be encouraging for the economy and not weak enough to cause any economic fears. However, it was exactly in line with what the Fed wants to see and increased the chances of a rate hike in September. The three-month average job gain is now +235,000 and the Fed speakers have said they want to see consistent gains over 200,000.

In a post payroll survey on Friday 16 of 17 analysts now believe we will see a rate hike in September. The lone abstainer was Jon Hatzius from Goldman Sachs. He believes the mediocre economics other than the payroll numbers will keep the Fed on hold until December. With the ECB and IMF asking the Fed not to hike until mid 2016 because of the slow growth in the rest of the world the December meeting could be a compromise between the Fed's desire to hike in 2015 and their desire to be socially acceptable to those other banks.

The Fed Funds Futures are now showing more than a 60% chance of a September rate hike of 25 basis points. There are conflicting views on whether it will be a one-and-done hike just to get the ball rolling or whether it will be the first of three over the next 6-9 months. The Fed is expected to delay further hikes once they get to 75 basis points. Currently the stated Fed funds rate is "0.0% to 0.25%" or 0.125%. If the Fed hikes 25 basis points as expected that would mean they would have to state a rate at 37.5 basis points to get away from the current "range" quotation. That also gives the Fed the opportunity to hike again in December with a "token" hike of 12.5 basis points to bring the target rate back to .50% and an even number to facilitate future quarter point hikes.

Larry McDonald, head of U.S. Macro Strategy at SocGen, warned Friday that trouble is coming. He said the Fed was facing the potential of an impending recession from what he called the seven-year itch. Since the 1950s for every two-term president, the economy entered a recession beginning in the seventh year of the president's term. This occurred during the terms of Eisenhower, Nixon, Regan, Clinton and Bush. The markets declined -50% in the Eisenhower recession, Nixon -26%, Regan -48%, Clinton -56%, Bush -56% and McDonald is suggesting a -56% decline for the Obama recession. Obviously, there are numerous analysts that object to this forecast. Goldman Sachs recently predicted a continued bull market through 2018.

McDonald's team found that the election cycle in year eight caused significant economic uncertainty. Candidates began to present their plans for spending cuts and government restructuring and that upsets the status quo from the prior 7 years. McDonald pointed out that government spending was 28% of GDP in 2000. That has risen to 37% of GDP today and that is not sustainable.

He also pointed out that the Fed has had a zero interest rate policy for six years. That is the longest period of accommodation in recent history and the Fed has never unwound low rates without upsetting the market. Since 2008 there has been more than $21 trillion of economic stimulus including $4 trillion from the Fed and $17 trillion in deficit spending by federal, state and local governments in an effort to jump start the economy. That pace is also unsustainable. Since 2008 more than $56 trillion in debt has been created. A rising interest rate policy will negatively impact that debt. Full Interview

I am only presenting his analysis as one view of the market and the economy. I am not claiming he is right or wrong but Societe Generale is not a small company. Back in January, McDonald also warned that the rising dollar was creating tremendous systemic risk. In the Q2 earnings cycle we have seen the impact of that dollar strength and a Fed rate hike will only push the dollar higher. Investors should always listen to all market views so that they are fully informed if market conditions change.

Another contrary view came from Bill Gross. Employment is only one factor in the Fed raising rates. The other is inflation. They are currently targeting 2%. On Friday, Gross warned that the global economy was "dangerously close to deflationary growth." Once there is a "whiff of deflation, things tend to reverse and go badly."

Gross pointed to the CRB Commodity Index, which is not just at a cyclical low but is now lower than the 2009 financial crisis low. He said the commodity markets tell a truer story of what is happening in the global economy because they are subject to real-time supply and demand. Everything has plunged because of China's economic decline and rising gluts in markets is further depressing prices. Do not trust China's 7% GDP number but focus on the lack of demand for commodities that point to much slower economic activity in China.

With commodity prices falling sharply it will be hard for inflation to rise. However, Gross does believe the Fed will hike rates by 25 basis points in September. He said the Fed really wants to move in 2015 despite a change in posture by the Bank of England that voted 8-1 to keep its rates unchanged and suggested they would not consider a move until mid 2016. That was more dovish than the prior vote at 7-2 with expectations for a 2015 hike. The global economy is not healthy.

While analysts may be expecting a rate hike next month the bond market is looking the other way. Yields on the ten-year treasury declined -2.64% to 2.175% on Friday. If bond investors were expecting a rate hike, the yields would be going higher.

However, one analyst said this was actually prompted by flight from high-yield ETFs, which are imploding. Money coming out of the high-yield market is looking for a temporary safe haven and that turned out to be the ten-year treasury. Money is fleeing the high-yield market because of worries over increasing default risk and the potential for a rate hike.

Over the last six years, the high-yield ETF has had a positive correlation to the S&P-500. That correlation is breaking down with the HYG now trading below the S&P on a relative basis. Analysts are mixed on what this means for the market but most suggest any further breakdown in the HYG would negatively impact the S&P.

The Dollar Index rallied to a new four-year high at the open on the payroll numbers but then crash back to a three day low on profit taking and risk that the jobs number was not strong enough to push the Fed to hike in September. Yes, every market sector seemed to have a different view of how the payroll numbers would impact the Fed. That is what makes a market.

Now that we have moved into the forecasting phase for the Q3 GDP the Atlanta Fed has begun their GDPNow series for this quarter. The initial forecast is for 1.0% growth. That is hardly enthusiastic and the Fed has to be fully aware of the implications of a 1% quarter at this point in the economic cycle. This would be the counterweight to the expectations for a Fed hike in September. This number will change as the economic reports for the July period begin to appear but I would be surprised if there was a sudden rise. Note that the average forecast from the private sector is 3.2% growth. Good luck with that!

The Atlanta Fed's GDPNow was dead on with its real-time forecasts for GDP for Q1 (0.6%) and Q2 (2.3%). If they are right about the Q3 GDP and it stays at the 1% level we will not be talking about a rate hike but may be talking about the potential for QE4.

I apologize for all the wonky economic analysis today but that was moving the market.

The calendar for next week does not have a lot that will interest investors. The retail sales for July on Thursday is the most important piece of data and the rest of the reports are filler. The producer price index on Friday is probably the next most important.

After the close on Friday, First Business Financial Services (FBIZ) announced a 2:1 split. The stock is thinly traded with only 4.34 million shares outstanding. I would not expect a tradable split run.

In stock news, Intel (INTC) was downgraded from buy to hold at Drexel Hamilton and the price target cut from $40 to $30. The firm cited declining visibility in the PC and server markets. Intel has said the slowing of processor sales and the difficulty of advancing the technology has delayed the introduction of the newer technology. Intel debuted the 15-nanometer chips in 2015 and expects to release its first 10 nm chips in late 2016. However, IBM announced they were going to release 7 nm chips in 2017 or early 2018. Despite the monumental increase in difficulty in continuing to reduce the size of the pathways on the chips the battle continues.

For comparison, Intel's Core I7 14 nm chips have roughly 1.9 billion transistors. The 7 nm chips will have roughly 20 billion transistors. That is a monster jump in capability and it appears IBM will be the first to make that leap.

Intel shares declined only fractionally on the downgrade.

Elsewhere in the chip sector Nvidia (NVDA) posted earnings of 34 cents that beat estimates for 21 cents. Revenue rose +4.5% to $1.15 billion and also beat estimates for $1.01 billion. The company raised current quarter revenue guidance to $1.18 billion compared to analyst estimates for $1.1 billion. Nvidia said demand was soaring for high performance graphics chips designed for the high end gaming market. Gamers will always upgrade. They always want the best and each version of a new video game has higher end graphic requirements. There are several hundred million gamers and they upgrade their PCs regularly to get the best performance possible. The company is also seeing orders increase for graphics chips used in cars.

Sales in the graphic chip business rose +9% according to Nvidia. Gartner Inc reported separately that PC sales declined -9.5% in Q2. Apparently Nvidia has the right chips at the right time. Pixar just licensed a suite of Nvidia technologies in a multi-year agreement to speed up graphics rendering in GPUs and other parallel computing architectures.

Michael Kors (KORS) reported earnings of 87 cents compared to estimates for 75 cents. However, they guided for the current quarter for earnings in a range of 86-90 cents and revenue of $1.07 billion and analysts were expecting 98 cents on revenue of $1.11 billion. That would have been an instant disaster but they upgraded the full year forecast. Kors said it would earn between $4.40-$4.50 for the year and well over the $4.26 estimate. Revenue of $4.75 billion would also exceed the $4.66 billion estimate. Nomura reiterated a buy rating. Cowen & Co reiterated an outperform rating. BB&T upgraded them from hold to buy. Piper Jaffray cut them from hold to sell.

Herbalife (HLF) continued its two-day gain after the company posted earnings of $1.24 compared to estimates for $1.11. Revenue also beat. The company raised guidance for the current quarter to a range of $1.00-$1.10 compared to analyst estimates for $1.01. Revenue was also hiked over analyst estimates.

Sales in China are sparking the gains. Sales rose +38% with new representatives rising +40% to the highest level seen in years. The company also had strong sales gains in Russia and Korea but experienced sharp declines in Venezuela because of the economic turmoil in that country.

Stamps.com (STMP) soared +28% after posting earnings of 97 cents. Total revenue was up +41% to $48.4 million. Mailing and shipping gross margins were 80.8% and total margins 79.5%. They raised full year guidance to a range of $170-$190 million, up from $165-$180 million. Earnings guidance rose from $2.55-$2.95 to $3.10-$3.50. Shares hit a new historic high on 6 times the normal volume. There must have been a lot of shorts.

Technical service company Engility Holdings (EGL) saw a 38% spike in its shares after posting earnings of 51 cents and beating by 5 cents and raising guidance. They announced a contract worth up to $200 million to supply systems engineering and integration services to the US Air Force GPS division. They also won a $35 million contract for radar engineering, support and logistics for the Naval Surface Warfare Center. Their conference call was very bullish.

Cheniere Energy (LNG) shares rose +6% after Carl Icahn announced an 8% stake of 19.4 million shares worth more than $1 billion. In a filing with the SEC he called the company "undervalued" and said his team plans to have discussions with the board about operations, capital expenditures, financing and executive compensation. They may also push for a seat on the board. Cheniere has one of the highest paid CEOs in the USA. Charif Souki has rescued Cheniere from disaster more than once and the majority of his compensation is in shares. I am a fan of Cheniere Energy as they will be the first to actually export LNG from the USA. Their first of 11 trains under construction will begin exports late this year. They have long-term 20 year contracts to sell liquefied natural gas as LNG to overseas buyers who pay up to six times the cost of gas in the USA.

After the bell, Berkshire Hathaway (BRK.A) reported earnings of $2,442 per class A share, down -37%, to $4.01 billion. Analysts were expecting $3,038 per share. Revenue rose +3% to $51.37 billion. Net investment and derivative gains fell -94% to $123 million, down from $2.06 billion. Earnings from insurance fell -39% to $939 million and included a $38 million loss. The Geico car insurance unit caused the decline with underwriting gains falling -87%. Accident losses cost more than premiums received and Berkshire is raising premiums as a result.

The BNSF railroad saw profits rise +5% to $963 million despite lower shipments of oil, coal, fertilizer, etc. Berkshire ended the quarter with $66.59 billion in cash. The Berkshire B shares declined $2 in afterhours.

Depomed (DEPO) shares rallied 9% after the company sent an open letter to Horizon (HZNP) CEO Timothy Walbert. Reportedly Walbert had offered to raise the bid for Depomed, currently $33 and all stock, to include a 25% cash component. However, Walbert has not yet made a formal proposal to confirm that conversation.

The Depomed CEO, James Schoeneck, posted an analysis to the company website on Friday showing that Depomed would contribute 33% to 35% to the combined company's revenue in 2016 and 2017. He said Depomed shareholders are entitled to an ownership interest that is commensurate with the Depomed contribution. Apparently, this was a "put up or shut up" letter and analysts believe this represents a step forward in the acquisition process. Depomed had previously charged that Horizon announced the offer before there was an agreement to drive up its own stock price and increase the value of the offer.

The Biotech sector was responsible for a significant portion of the Nasdaq decline over the last two days. In those two days the sector fell -5% from the Wednesday high. There were several high profile earnings misses from biotech stocks and the sector imploded. The 100-day average has been support since last October and that failed last week. Previously investors that bought that support were rewarded. This time the jury is still out.

Halliburton (HAL) and Schlumberger (SLB) have moved into the banking business. The service companies have been hurt by the drop in the active rig counts and they have billions in equipment currently parked and not in use. They have come up with a "frac now, pay later" plan for producers. In some cases, they are acting as lenders with a note arrangement where they do the work on credit and expect to get paid at some point in the future when prices improve. There is also a rumor they have negotiated for a portion of the well's production until the cost of the frac job has been paid.

Halliburton is using part of the $500 million in capital investment from BlackRock in order to fund the work. Halliburton saw its Q2 profits fall from more than $500 million to only $54 million because of the slowdown in the fracking business. Halliburton will not say how many clients are taking advantage of this financing citing confidentiality. Schlumberger said it had eight onshore "refracking" clients. That is a new program being developed by Schlumberger to restart older wells that have seen production decline significantly. EOG and Anadarko both said the refracking technology needs improvement. Apparently the Schlumberger technology is a work in progress. Chesapeake and Devon Energy said they have been refracking and they are happy with the results.

Both HAL and SLB need some help. Their shares are headed for 52-week lows.

Crude oil collapsed with a $3 loss for the week to come very close to the March low at $42. Fears of rising production, slowing demand and the strong dollar were to blame. Refiners will begin to shut down for maintenance in about two weeks as summer driving demand fades. Inventories will begin to rise again as we enter the post summer low demand period. However, refinery utilization was at the high for the year last week at 96.1%. Refiners are building up supplies going into the Labor Day holiday and ahead of their switch over to winter fuel blends.

Active rigs rose +10 last week to 884 with oil rigs rising +6 to 670. Gas rigs rose +4 from their 18-year low to 213. The most surprising was the gain of +4 offshore rigs to 38. The recent low was 27 in mid June, down from more than 60 in December.

If rigs continue to rise, it is going to weigh on crude prices. Production in the U.S. has not declined significantly, only -145,000 bpd from the June highs. If production were to level off here or even climb the price of crude would fall sharply.


Short squeeze ahead! With the Dow down seven consecutive days there has to be a short squeeze of several hours to several days in our future. Markets simply do not go up or down continuously without a reversal to relieve the pressure.

Despite the current decline the Dow is only down -2.5% for the year while the Nasdaq is still up +6.5% and the S&P +1%. We are not yet in a correction but more than likely a portfolio restructuring process ahead of the September rate hike. It could turn into a correction but we are a long way off from that becoming a reality. The S&P has not even broken the lows from the prior week at 2063.

The 200-day average at 2073 was broken by -5 points intraday but came back in the afternoon after the American Express news broke and triggered some short covering. I would not count on it as support next week. The 2063-2065 lows from July 27th are the key. If we make a lower low, the odds are good we are going to also break the 2044 low from early July. While a rebound from that level would be nice, I would not count on it. You can set up a short-term trade if we begin to rebound from that vicinity but I would be quick on the exit trigger if the rebound rolls over.

There is a short squeeze in our future. You can count on it so do not get too bearish in your positions. I would look to sell any bounce rather than pile into bearish positions at this level.

The Dow was down for seven consecutive days but the Bullish Percent Index only declined -1%. This suggests the decline is more of a Dow decline than a market decline at this point. If this index breaks below 50% it could decline in a hurry. There are a lot of stocks right on the borderline between a bullish and bearish chart.

The Dow chart is again the most bearish. Support failed, resistance held, and Friday's close was a six-month low. More than half the Dow stocks are in correction and several others are close behind. The 50-day average is only 23 points away from closing below the 200-day average in what is called the death cross.

The next material support level is the range between 17,050-17,150 and the December-February lows. There is also the 17,130 support from July 2014. We really need for those supports to hold because the next level to test is the October lows back in the 16,000 range. We do not want to go there!

The Dow is in unsupported space and the path of least resistance is still down.

The Nasdaq lost -85 points for the week. That is remarkable when you consider it was down more than -100 points intraday on Thursday alone. Support at 5000 was close to being tested on Friday with the low at 5006. The 100-day average at 5036 was broken severely intraday but the rebound to close at 5043 put that support back into play. However, at this point I would not count on it. The big six Nasdaq stocks are no longer leading the market higher. Once the profit taking in those six is over then a new rebound may appear.

Apple firmed and was fractionally positive for the last two days at $115. Google is stuck on support at $660 but the intraday ranges are narrowing. That suggests a breakout in the near future but the direction is still uncertain. Netflix actually lost $3 on Friday but also remains stuck to the recent highs. There is lots of intraday volatility but the battle between buyers and sellers is not over.

Gilead finally cracked with the biotech sell off and shares fell from $120 to $114. Amazon fell from $540 to close at $522 and a two-week low. The selling was not heavy and I do not think it is over. Biogen struggled for 8 days to recover from $300 to $340 but most of those gains were erased over the last two days with a close at $309 on Friday.

The key level to watch next week is 5000 followed by 4950 and 4900. The 150-day average is 4958 and there converging support levels at 4900. Resistance would be Thursday's intraday high at 5062 and then 5100.

The Nasdaq cumulative advance/decline line is plunging toward levels not seen since October. The big caps may still be holding up the index but the number of declining stocks is accelerating. The percentage of Nasdaq stocks over their 200-day average has declined to 43.12%.

The Nasdaq 100 remains the best-looking chart simply because the tech big caps have been pulling the market higher. Support at 4485 was tested on Friday and uptrend support at 4520 captured the close. Until the big cap tech stocks breakdown completely the market still has a chance of recovery.

The small cap Russell 2000 chart is trouble. The Russell closed below multiple levels of support and could easily decline to 1150. The intraday low was exactly 1200 and that is the last line of defense before falling off the cliff. The support at 1206 was broken intraday but the index rebounded to cling to that level at the close.

Despite more than half the stocks in the S&P being in correction territory, the broader market is holding its gains. The Vanguard Total Stock Market Index ETF (VTI) remains locked in the sideways pattern and above support at $106. This ETF represents 3,814 stocks and is the broadest market indicator. We are not in a correction until this index breaks down.

If you want logic don't look in the stock market. Despite the longest consecutive streak of Dow declines since 2011 the bullish sentiment rose in the AAII Investor Sentiment Survey. Bullish sentiment rose +3.2% and bearish sentiment declined -9%. Neutral sentiment rose +5.8%.

Before your brain explodes on this seemingly contradictory data I will tell you that the survey cuts off on Wednesdays. This data is before the Nasdaq declined -100 points intraday on Thursday. I expect the survey published next Wednesday to be significantly different.

  This is the 19th consecutive week that bullish sentiment has been below its historical average of 38.8%. This is the longest streak since July 2012.

There is a short squeeze in our future. It may be Monday or later in the week but you can bet it is coming. The Dow is too oversold to continue much lower without either a downside capitulation event or a short squeeze or both.

As I stated earlier I would view a rebound as a potential entry point for new short plays or puts. The worry over a potential Fed rate hike with the economy growing at 2% or less and inflation actually declining is going to weigh on the markets. Be prepared for some additional volatility in both directions.

If you did not get the posts I made to the Option Investor Facebook page last week on Apple, Disney and Netflix, please like our page so you will receive the posts on specific stock events this coming week.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts

Gold has declined for seven consecutive weeks. That is the longest losing streak since 1999. The recent range has been between $1,080 and $1,100 but the closer we get to a Fed rate hike the lower it is going to go. The strong dollar is killing the price along with low industrial demand. Gold coins are flying off the shelves at the U.S. Mint and the Canadian Mint. They cannot keep coins in stock. The same is true with silver coins. Gold is down -9% since the recent $1,205 high in June. Most analysts believe we will see $1,000 and some are expecting $980.

The first republican debate on Fox News drew a record shattering 24 million viewers. That was the highest number for any news show ever and the highest non-sports cable show ever. The "happy hour" debate with the 7 lowest ranked candidates drew 6.1 million viewers making it the third highest viewed primary debate ever on cable. Considering it started at 5:PM ET that is a huge rating.

In the 2012 election cycle, the most watched debate drew 7.63 million on ABC in December 2011. In the 2008 cycle the most watched was debate was 7.35 million on ABC on January 5th.

Investing turned out to be much harder than farming in China. Since the end of June 24 million new investors have already closed out their trading accounts. The number of retail investor accounts soared from almost none in early 2014 to 75 million at the end of June. The CICC said the number dropped to 51 million at the end of July.

Bank of America Merrill Lynch's Steven Suttmeier took a look at what happens when the S&P 500 fails to perform above its long-term average through the first half of the year. Source

A lackluster 2H tends to follow a lackluster 1H
The average S&P 500 return for the first half of the year (1H) going back to 1928 is 3.65%. The 1H 2015 return of 0.20% is well below average and a lackluster second half of the year (2H) tends to follow a sub-par 1H. The average 2H return is 3.90% with the S&P 500 up 66.7% of the time, but when 1H is below average, 2H is up 57.1% of the time with an average return of only 1.42%. When the 1H return is above average, the average 2H return is 6.22% with the market up 75.6% of the time.

This is a really good article about the economic forecast as projected by the Economic Research Council Institute (ECRI) and their Weekly Leading Index. It conflicts strongly with the Fed's forecast. I am not going to try and reproduce it here because there are several charts and they become unreadable if I shrink them down to fit this page. This is worth a read! Fed Collision Course

Monetary stimulus does not always work. The Bank of Japan said it was going to maintain its stimulus program at $640 billion a year. However, the Japanese economy contracted at an annual rate of -2% last quarter and inflation is on a path to turn negative. Negative inflation is called deflation and it is a lot harder to correct than inflation.

Apple is in the middle of its longest correction since the invention of the iPod. Apple hit its closing high of $133 on February 23rd. In the 164 days that have followed Apple shares are down -13.89%. Since the release of the iPod in October 2001 the stock has rallied roughly 10,000% from low single digits to that $133 level. Prior to this correction, the longest period was 124 days from February 2011 through June 2011.

China linked hackers attacked the systems of Sabre Corp (SABR), the travel reservations system created by American Airlines. Sabre was spun off from American in 2000. Chinese hackers previously targeted the systems of United Continental in early June. China has also been blamed for the attack on the Office of Personnel Management where personal information on 22 million people was stolen.

Intruders attacked a Pentagon email system used by the Joint Chiefs of Staff forcing the military to take it offline for up to two weeks to "cleanse" it of hacker code. The intrusion occurred around July 25th and appeared to be orchestrated by Russian state hackers. NBC news said the Russians were behind the "sophisticated cyber intrusion" which affected about 4,000 personnel. The attack came from a "spear-phishing" attack where someone inside the network clicked on a bogus link in a social media account that immediately collected information covering thousands of accounts and within a minute distributed that information to thousands of locations on the Internet.

In April Russian hackers broke into the Pentagon's unclassified network as well as the State Department and White House in the months prior to that attack.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Age is a question of mind over matter. If you don't mind, it doesn't matter."

Leroy Robert Satchel Paige (1906-1982)


subscribe now


New Plays

Delivering Disappointment

by James Brown

Click here to email James Brown


GrubHub Inc. - GRUB - close: 28.85 change: -0.34

Stop Loss: 30.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 08, 2015
Time Frame: Exit PRIOR to earnings
Average Daily Volume = 2.2 million
New Positions: Yes, see below

Company Description

Trade Description:
It's been a rough ride for investors in GRUB over the last year and a half. The roller coaster ride in the stock has taken a bearish turn for the worse in spite of strong growth numbers.

The company held its IPO in April 2014. GRUB priced about 7 million shares at $26.00 each. The stock opened at $40.00. Four months ago shares peaked at $48.00 after a very volatile year of trading. Today there are over 83 million shares outstanding (77 million in the float) giving GRUB a market cap of $2.4 billion. Annual revenues over the last twelve months were $283 million.

GRUB is considered part of the technology sector. It's lumped in with the Internet stocks. According to the company, "GrubHub (GRUB) is one of the nation's largest portfolios of online and mobile takeout food ordering and delivery services. Connecting diners to more than 35,000 restaurants in 900 U.S. cities and London, the company's platforms and services strive to make takeout better through innovative restaurant technology, easy-to-use platforms and an improved delivery experience. The GrubHub portfolio of brands includes GrubHub, Seamless, AllMenus, MenuPages, Restaurants on the Run and DiningIn."

The bulls do have a case. GRUB is seeing strong growth. They reported their Q1 results on April 29th. Earnings were $0.12 per share, which beat estimates by a penny. Revenues were up +50% to $88.2 million, also above estimates. GRUB said their Q1 saw active diners rise +46% from a year ago to 5.6 million. Their number of "daily average grubs" rose +30% from a year ago to 234,700.

The strong growth continued in the second quarter. GRUB reported on July 28th and results were $0.17 per share. That beat estimates by four cents. Revenues were up +46.7% to $88 million, also above estimates. Active diners were up +42% from a year ago to 5.9 million. Daily average "grubs" were up +26% from a year ago to 220,000.

Matt Maloney, GRUB's CEO, commented on their results, "We delivered significant year-over-year growth in the seasonally slower second quarter, driven by strong performance in all of our markets across the country."

Management then raised their 2015 revenue guidance from $346-361 million to $358-364 million. Wall Street was forecasting $360 million.

Unfortunately traders sold the news. The Q1 results ignited a sell-off in late April and GRUB continued to sink. There was a lot of volatility in the stock surrounding its Q2 results but investors have continued to sell GRUB in spite of its growth numbers.

The bears argue that GRUB is not only super expensive but it's facing growing competition. Uber is building up its UberEATS meal delivery service. Yelp is trying to build up its Eat24 service. That's on top of other competitors like BeyondMenu, Delivery.com, and MyPizza.com. Even Amazon.com is getting in the food delivery game with a service for Amazon Prime members in Manhattan.

The shorts seem to have momentum in their favor. The most recent data listed short interest at 18% of the 77.2 million share float. The point & figure chart is bearish and forecasting at $13.00 target. The $30.00 level was major support and the breakdown is technically very bearish. It's possible that the IPO price at $26.00 is potential support but I doubt it. Traders have been selling every rally. Tonight we are suggesting a trigger to launch at $28.60. More conservative traders may want to wait for a new low under $28.00 as an alternative entry point.

Trigger @ $28.60

- Suggested Positions -

Short GRUB stock @ $28.60

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

Buy the SEP $27.50 PUT (GRUB150918P27.5) current ask $1.25
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:

Weekly Chart:

In Play Updates and Reviews

Up One Week, Down The Next

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market has been oscillating back and forth, up one week and down the next, for the last four weeks in a row. On Friday stocks managed a midday bounce but the major indices still closed in negative territory.

We have updated stop losses on KR, BBY, and WLL tonight.

Current Portfolio:

BULLISH Play Updates

AGCO Corp. - AGCO - close: 56.93 change: +0.69

Stop Loss: 52.85
Target(s): To Be Determined
Current Gain/Loss: +1.4%
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

08/08/15: AGCO continues to ignore the recent market weakness. Shares outperformed the broader market on Friday with a +1.2% gain, marking its third rally in a row. AGCO is now testing potential resistance at its late June high in the $57.00-57.25 area. I wouldn't be surprised to see a short-term pullback here. Broken resistance near $55.00 should be new support.

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: 45.15 change: +0.18

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

08/08/15: It looks like our patience with CAG might pay off. Shares have continued to climb, ignoring the market's recent weakness. CAG is on the verge of hitting our suggested entry point 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: 47.93 chg: +0.24

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

08/08/15: HIG displayed relative strength on Friday. Shares briefly traded below technical support at the 01-dma and then rebounded to a +0.5% gain on the session. We are waiting for a new relative high.

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: 37.82 change: -0.90

Stop Loss: 37.45
Target(s): To Be Determined
Current Gain/Loss: -3.1%
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

08/08/15: It's disappointing to see shares of KR retreat lower so quickly. Last Monday the stock had closed at new highs and looked poised to run. It looks like someone wanted out on Friday morning. Shares of KR sank toward $37.50 before starting to bounce.

We are turning more defensive on our KR trade and moving the stop loss up to $37.45.

No new positions at this time.

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

08/08/15 new stop @ 37.45
07/30/15 triggered @ $39.05
Option Format: symbol-year-month-day-call-strike


21Vianet Group, Inc. - VNET - close: 20.65 change: +0.24

Stop Loss: 19.20
Target(s): To Be Determined
Current Gain/Loss: -0.5%
Entry on July 23 at $20.75
Listed on July 22, 2015
Time Frame: Exit PRIOR to earnings on August 26th
Average Daily Volume = 996 thousand
New Positions: see below

08/08/15: VNET is still slowly inching higher. Shares need to move faster since we don't have a lot of time. The company is scheduled to report earnings on August 26th and we do not want to hold over the announcement.

Previously I suggested waiting for a breakout past $21.00 before launching new positions. That plan can still work but keep our time frame in mind.

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: 20.96 change: -0.59

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

08/08/15: Thankfully ATI did not see any follow through on Thursday's bounce. Instead shares reversed sharply on Friday with a -2.7% decline.

We are still on the sidelines and waiting for a breakdown to new relative lows. Our suggested entry point is $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: 30.76 change: -0.35

Stop Loss: 31.65
Target(s): To Be Determined
Current Gain/Loss: +4.2%
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

08/08/15: The big BBY story on Friday was news that the Apple smartwatch (AAPL) finally arrived on BBY shelves. This is expected to boost traffic to BBY stores and boost sales of the smartwatch for AAPL. However, shares of BBY sank again with a -1.1% decline to new 2015 lows on Friday.

Tonight we are adjusting our stop loss down to $31.65.

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

08/08/15 new stop @ 31.65
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: 25.38 change: +0.18

Stop Loss: 26.05
Target(s): To Be Determined
Current Gain/Loss: -2.5%
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

08/08/15: Believe it or not but MIK is virtually flat for the week (+$0.04). The stock has been churning sideways in the $24.50-25.50 zone for almost two weeks now. The trading is starting to look like a bear-flag consolidation pattern. However, that could just be wishful thinking on my part.

The $25.50 and $25.80 levels are short-term overhead resistance while $24.50 remains short-term support. I am not suggesting new positions at this time. We only have two or three weeks left on this trade before MIK reports earnings (likely in the last week of August).

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: 17.92 change: +1.07

Stop Loss: 20.35
Target(s): To Be Determined
Current Gain/Loss: +9.7%
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

08/08/15: It looks like the oversold bounce in energy stocks is already over. Crude oil fell to new relative lows (again) on Friday. Shares of WLL saw their rebound fail beneath round-number resistance at $20.00. Shares then reversed into a -5.6% decline after a +7.2% bounce on Thursday.

Tonight we are adjusting the stop loss down to $20.35.

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 @ 20.35
08/05/15 new stop @ 21.25
08/03/15 triggered @ $19.85
Option Format: symbol-year-month-day-call-strike