Option Investor

Daily Newsletter, Monday, 8/17/2015

Table of Contents

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

Market Wrap

Hanging On The News

by Thomas Hughes

Click here to email Thomas Hughes
Bad news sent the market lower, good news sent the market higher.


A mix of news sent the market spinning. First, bad news sent the indices down to test support, next good news caused a bounce that reversed early losses and sent them higher. The most talked about subject was the PBOC re-pegging of the yuan, which happened again Sunday night, followed by weak Japanese GDP, weak Empire Manufacturing data and strong housing numbers. . . all of which got tied back to the FOMC and rate hike expectations.

The PBOC re-pegged the yuan again. The move caused ripples of fear to spread throughout the market and contributed to negative sentiment. Along with this was weaker than expected GDP data from Japan, together leaving Asian markets mixed. Japan closed higher on stimulus hopes while Chinese indices were split. The BOJ is meeting this week with a Thursday statement on the schedule, no changes to policy are expected.

Market Statistics

European markets were higher in early trading despite the weakness in Japanese data. Later in the day they reversed, likely in response to the early sell-off in our markets, but were able to recover most of the losses before the close of trading. Greece was also a topic in international headlines and played a part in early market actoin. The Greek parliament accepted the latest reform-for-money package offered by creditors and is now awaiting ratification by EU member nations. The deal is largely expected to go through but faces tough criticism.

Futures trading was indicating a lower opening all morning. In the earliest part of the pre-market session the decline was marginal but it deepened after the release of the Empire State Report On Manufacturing. It declined to its lowest level since 2009 and sent futures to the lows of the morning.

At the open the market sold of as expected. The selling continued for the first 20 minutes or so. The bears could not get the market to break down and last week's support levels held, near 2080 for the S&P 500. By 10:15 negative sentiment had reversed and the market was moving up and off of the low, a move sparked by the NAHB survey. It showed housing conditions to be a little better than expected. The market reached break even levels by lunch and by early afternoon were setting new intra-day highs. There were a few brief pauses during the afternoon session but the indices pushed higher into the close with many closing near the highs of the day.

Economic Calendar

The Economy

Empire Manufacturing declined to -14.9 in August, versus an expected rise to 4.5. This was no doubt a shock to the market and reason for weakness in early trading. The decline is due to large drops in New Orders, Shipments and Inventories which fell to -15.7,-13.8 and -17.3 respectively. The workweek and earnings remained flat however and there was a rise in Future Expectations. The forward looking measure gained 7 to hit 33.6.

The National Association Of Home Builders released their monthly survey of home builder sentiment at 10AM. The headline reading of 61 is a gain from last month's reading of 60 and above consensus estimate of 59. On a year over year basis the reading is up 6 points from last August and the highest level since November, 2011. Within the report traffic rose 2 points to 45 but remains below the 50 mark, the current sales rose one point to 66 and future sales expectations held at its high of 70. According to NAHB economist the report shows continued and steady improvement in the housing market.

Moody's Survey Of Business Confidence jumped 1.3 points to hit 44.5, the second week of robust increase. The survey reflects high levels of global optimism, particularly in the US. Mark Zandi, Moody's economist, says that US businesses are reporting strong sales and business conditions with little effect from actions in China. This is the highest level in 3 months and the 3rd highest level all-time.

There is no report from FactSet this week, the next one is due out in two weeks. At last report the blended rate for earnings was -1.0%. This week could further influence that number as the bulk of the big retailers are due to report. Be on the look out for Target, Wal Mart, Lowes, Home Depot and many others.

The Oil Index

Oil prices sank to another new low in today's session. WTI sank to prices below $42.00 following the Japanese GDP data but were able to recover. Shrinking Japanese economic output is yet another drag on expected global demand while supply is rising. Last week's rig counts show a small uptick in US capacity, yet another sign of ample supply. By midday prices for both WTI and Brent had moved back to break-even levels but could not hold the gains. Weakness is likely to persist in the near to short term so long as supply and demand expectations remain unchanged.

The Oil Index closed slightly lower in today's session creating a small spinning top. The index moved down on the early weakness in oil and touched 1,200 level, just above recent support, before recovering to break even by end of day. It looks like the index is stabilizing around the 1,200 level with bullish momentum and rising stochastic. However, upside momentum may have stalled after hitting resistance near 1,235 and with oil prices hitting new lows a test of support looks more likely than one of resistance. First support target is near 1,175 and could go lower should oil prices continue to decline.

The Gold Index

Gold prices are holding steady and moving higher as Chinese PBOC moves are raising fear levels in the market. Today's economic data also sent a ripple through the gold market that helped to give it a lift. Weak Empire numbers do not bode well for interest rate hawks and could weaken the dollar/strengthen gold if rate hike expectations get pushed back.

Gold has now traded above $1100 for the 6th day in a row and could be setting up for another leg up. FOMC minutes are due out on Wednesday and, along with the data, will provide yet another clue to the interest rate lift-off time line. A hawkish fed and stronger dollar could send gold back to test recent lows near $1080, a dovish fed and a weaker dollar could send it up to hit $1150. Also, reports of physical buying have increased so any downside could be muted. Asian and European buyers are taking advantage of low prices due to economic uncertainty. In another report billionaire Stanley Druckenmiller has increased his holdings to their largest levels ever.

The gold miners got a lift today as well. Rising gold prices and a couple of upgrades in the sector helping to provide support. The Gold Miners ETF made some gains in today's action, about 3.5%, but trading remains beneath the short term moving average and resistance levels near $15.50. The ETF has bounced back from recent lows along with the underlying commodity but remains near those lows. The indicators show momentum has shifted to the upside with a retest of resistance possible but longer term direction is tied to gold prices and the FOMC. Inflation may be the key, the FOMC minutes and CPI data are potential catalysts.

In The News, Story Stocks and Earnings

Earnings season is winding down but it is not over yet. This week's list is very short but chocked full of big name retailers like Home Depot, TJ Maxx, Wal Mart, Target, Staples, Lowes, Sears, Gap Footlocker and many others. The only name on the list reporting today was Urban Outfitters. The teen retailer reported after the bell and sent shares soaring higher. The company beat both revenue and sales estimates, posting $0.54 per share versus the expected $0.49.

The Retail Sector Spyder XRT was one of today's leading sectors. The ETF gained a little more than -.5% and extended its bounce from support. Today's action broke above a potential resistance line near $97.40 but has not yet reached the short term moving average. The indicators are consistent with range bound trading a possible move up from support. Divergence in MACD suggest support at the bottom of the range, between $95 and $97, while stochastic confirms upward movement with a strong bullish crossover. MACD has not yet confirmed but is crossing over at this time, first target is the moving average with the top of the range, near $102, as target should the moving average be crossed. Earnings in the sector are the tell and more importantly outlook for earnings into the holiday season and beyond. If Urban is a sign of what to expect then upside movement is looking more likely.

The Home Builders were today's leading S&P sector, driven by the NAHB survey. The XHB Home Builders ETF gained more than 1% on the news and set a new high dating back to late January 2007. The NAHB data went a long way toward supporting the ongoing rebound in housing and by extension expected growth in the housing sector and profits for home builders. The rebound is not strong or robust but it is steady, has been gaining momentum and is at high levels so should not be ignored. Today's move looks strong and is confirmed by rising indicators but the indicators themselves are not strong so caution is still due. Stochastic at least is flat and possibly showing a top. Possible target is $40 with housing data, and data, as potential risk and catalyst. Two releases are due tomorrow, Housing Starts and Building Permits, Existing Home Sales comes out on Thursday. New Homes sales is scheduled for early next week.

Looking out to next quarters earnings season I am interested in the health care sector. This is because they more than doubled earnings expectations in the 2nd quarter and could do so again. Last quarter they were projected to grow earnings 7%, they produced 15.4%. They are expected to grow earnings at a rate of 7% in the third quarter and since there has been little change in the underlying fundamentals driving the sector there is a chance for significant upside surprise yet again. The sector has been trending higher since the beginning of the year and is set up for a trend bounce. Today's action carried the Healthcare Spyder XLV up off of its trend line with a long white candle and mixed indicators. MACD momentum is bearish but retreating from a peak, consistent with a trend line bounce, but it is not yet confirmed by stochastic. The ETF could move up to test resistance near $97.50 but does not appear strong enough to break resistance at this time.

The Indices

The tech heavy NASDAQ Composite led today's field of major indices. The index gained 0.86% in a move creating a long white candle closing at the high of the day. The move is a bounce from the long term trend line that breaks above the short term moving average and looks set to trend higher. The indicators are mixed but rolling over into a trend following signal. MACD is still bearish, stochastic looks stronger with %D flat and %K making a bullish crossover. Upside targets are 5,150 and 5,250 depending on news/data with support along the trend line.

The Dow Jones Transportation Average made the next largest move, 0.73%, and confirmed support. Today's action carried the index down to support at 8,250 where it confirmed with another bounce that created a candle with long lower shadow. Price action was centered around the short term moving average and closed above it, at the high of the day. The indicators are weak but are consistent with support at current levels, 8,000 and 8,250. Despite weakness momentum is bullish, barely, with a target near the next resistance line at 8,500.

The S&P 500 made the third largest gain in today's session, just over one half percent at 0.52%. The broad market tested support at 2,080 and closed above the short term 30 day moving average. Today's move is a trend following bounce confirmed by indicators but remains well within the recent range and below short term resistance levels. The indicators are rolling into a trend following entry led by stochastic which is creating a strong bullish crossover. MACD has yet to confirm but is hovering at the zero line. The index looks set to test resistance at the all time high and top of the current trading range but may remain so while data, earnings and the FOMC hang over the market. Upside target is near 2,125 with support at or just below 2,080.

The Dow Jones Industrial Average comes in last place today with a gain of only 0.39%. The blue chip index created a small bodied candle but one with long lower shadow as sign of its test of support. The index is moving higher following a bounce made last Wednesday but is still below the short term moving average and long term trend line. Despite being bellow the trend line at this time the trend remains up and this bounce is trend following and supported by the indicators. Stochastic is showing a strong bullish crossover while MACD crossing the zero line. A break above the trend line and resistance near 17,500 and 17,750 would help to confirm.

The indices closed up for the day but remain trapped inside their respective trading ranges. Today's news helped to confirm support levels in each of the indices but did little to give evidence of impending break out and may remain trapped in this range until the FOMC meeting next month, or earnings outlook begins to brighten.

This week poses a potential catalyst to significant price movement in the form of the FOMC minutes due out on Wednesday afternoon. It's hard to say whether or not there will be a rate hike in September but it is easy to say that whatever they put in the minutes will be significant to the market.

Data and earnings will also play a factor. Tomorrow two important pieces of the housing picture will be revealed, housing starts and building permits, and expectations are for growth. Later in the week Existing Home Sales as well as important CPI data, Philly Fed and Leading Indicators may sway sentiment.Earnings, along with a glimpse of consumer strength, comes in the form of reports from a dozen top names in the retail sector and may also sway sentiment.

The long term earnings and economic trends are up so I remain a bull. Short term trends are more sideways as numerous caution inducing factors play themselves out so I am very cautions. So long as none of the short term issues derail long term trends I will be looking to buy on the dips.

Until then, remember the trend!

Thomas Hughes

New Plays

+23-26% Earnings Growth This Year

by James Brown

Click here to email James Brown


Bright Horizons Family Solutions - BFAM - close: 62.81 change: +0.32

Stop Loss: 59.75
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 17, 2015
Time Frame: Exit
Average Daily Volume = 176 thousand
New Positions: Yes, see below

Company Description

Trade Description:
BFAM has been a publicly traded company for less than three years. Since its IPO in early 2013 the stock has been marching higher and currently trading near all-time highs. The stock's relative strength is noteworthy with BFAM up +33% in 2015 versus an S&P 500 that's only up +2.1%.

BFAM is in the services sector. According to the company, "Bright Horizons Family Solutions is a leading provider of high-quality child care, early education and other services designed to help employers and families better address the challenges of work and life. The Company provides center-based full service child care, back-up dependent care and educational advisory services to more than 900 clients across the United States, the United Kingdom, Ireland, the Netherlands, Canada and India, including more than 130 FORTUNE 500 companies and more than 80 of Working Mother magazine's 2014 "100 Best Companies for Working Mothers". Bright Horizons is headquartered in Watertown, MA."

The company delivered +26.6% earnings growth in 2014. Their long-term earnings growth is estimated at +19%. However, 2015 is likely to outperform. Looking at BFAM's recent results the company has been beating analysts' estimates on the bottom line while the revenue number has been relatively close to in-line each quarter.

BFAM's most recent report was August 4th. They announced their Q2 earnings rose +29% to $0.53 a share. That was four cents above estimates. Revenues were up +6.4% to $370.5 million. Management raised their 2015 guidance. They now expect 2015 revenues to grow +7-10%. They're guiding for earnings growth to be in the +23-26% range.

Shares of BFAM surged to new highs and hit $66.00 following this earnings report and bullish forecast. The stock held support near its prior highs recently. This is impressive because on August 10th BFAM announced a secondary offering of three million shares. Normally investors tend to sell stocks when a company announces a secondary offering. No one likes seeing their investment diluted. Yet shares of BFAM held support. The secondary, being sold by stock holders and not the company, priced at $61.25 a share.

The trend of higher lows continues and now BFAM looks poised to rally again. Tonight we are suggesting a trigger to open bullish positions at $63.05.

Trigger @ $63.05

- Suggested Positions -

Buy BFAM stock @ $63.05

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.

Daily Chart:

In Play Updates and Reviews

Traders Buy The Monday Morning Dip

by James Brown

Click here to email James Brown

Editor's Note:
Traders were in a buy-the-dip mood this morning. The major U.S. indices rebounded off their morning lows and stocks delivered widespread gains.

HOLX hit our entry trigger today.

Prepare to exit our GMT trade tomorrow morning.

Current Portfolio:

BULLISH Play Updates

ConAgra Foods, Inc. - CAG - close: 45.13 change: -0.12

Stop Loss: 43.25
Target(s): To Be Determined
Current Gain/Loss: -0.5%
Entry on August 10 at $45.35
Listed on July 30, 2015
Time Frame: Exit PRIOR to earnings on September 22nd,
Average Daily Volume = 3.3 million
New Positions: see below

08/17/15: CAG managed to pare its losses from this morning but still closed in the red. Overall it was a pretty quiet session. I would wait for a rally past $45.60 before launching new positions.

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.

- Suggested Positions -

Long CAG stock @ $45.35

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

Long SEP $45 CALL (CAG150918C45) entry $1.35

08/10/15 triggered on gap higher at $45.35, suggested entry was $45.25
Option Format: symbol-year-month-day-call-strike

The Hartford Financial Services Group - HIG - close: 49.16 chg: -0.22

Stop Loss: 47.45
Target(s): To Be Determined
Current Gain/Loss: +1.7%
Entry on August 10 at $48.35
Listed on August 03, 2015
Time Frame: Exit PRIOR to September option expiration
Average Daily Volume = 3.0 million
New Positions: see below

08/17/15: HIG gapped open lower this morning and then spent the rest of the day drifting sideways to eventually close with a -0.4% decline.

No new positions at this time.

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.

*small positions to limit risk* - Suggested Positions -

Long HIG stock @ $48.35

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

Long SEP $50 CALL (HIG150918C50) entry $1.13

08/15/15 new stop @ 47.45
08/10/15 triggered @ 48.35
Option Format: symbol-year-month-day-call-strike

Hologic Inc. - HOLX - close: 42.92 change: +0.47

Stop Loss: 39.70
Target(s): To Be Determined
Current Gain/Loss: +0.6%
Entry on August 17 at $42.65
Listed on August 15, 2015
Time Frame: Exit prior to earnings report in November.
Average Daily Volume = 2.5 million
New Positions: see below

08/17/15: Our new trade on HOLX is open. The rally in HOLX continued this morning and shares broke out past resistance near $42.50. Our trigger to launch bullish positions was hit at $42.65. I would still consider new positions at current levels.

Trade Description: August 15, 2015:
HOXL looks like a strong bullish momentum trading candidate. The S&P 500 index is only up +1.6% this year. The NASDAQ is up +6.6%. Yet HOLX is up +58% and has more than doubled from its 2014 lows. That's because the new leadership team has turned things around.

HOLX's CFO was recently interviewed in CNBC. He said that 18 months ago their business was in decline and new leadership has turned things around. They see a lot of growth opportunities both in the U.S. and internationally, especially for their Genius 3D mammography business.

If you're not familiar with HOLX they are in the healthcare sector. According to the company, "Hologic, Inc. is a leading developer, manufacturer and supplier of premium diagnostic products, medical imaging systems and surgical products. The Company's core business units focus on diagnostics, breast health, GYN surgical, and skeletal health. With a unified suite of technologies and a robust research and development program, Hologic is dedicated to The Science of Sure."

The company has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Their most recent report was July 29th. HOLX reported its Q3 results of $0.43 per share. That's a +16% improvement from a year ago and four cents better than expected. Revenues were up +9.7% to $693.9 million, significantly above the $654 million estimate. GAAP gross margins soared +520 basis points to 54.6%.

Management raised their 2015 sales guidance from +7-7.4% to +9.1-9.5%. They also upgraded their earnings forecast growth from +13-13.7% to +17.1-17.8%. The stock soared almost +10% on this earnings report and bullish outlook.

Shares of HOLX have spent the last couple of weeks consolidating sideways in the $40.00-42.50 zone. This is bullish. Instead of correcting lower the stock has been digesting its gains in a sideways range. What makes this even more impressive is that HOLX has managed to maintain its gains even after legendary investor Carl Icahn said he had trimmed his position in HOLX. Icahn's company sold about six million shares in the $40 range. After this sale Icahn still owns 9.99% of HOLX. It's not like he's bearish on the stock.

Technically HOLX looks poised to breakout past short-term resistance near $42.50. If that occurs we want to jump on board. Tonight we are suggesting a trigger to open bullish positions at $42.65.

- Suggested Positions -

Long HOLX stock @ $42.65

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

Long DEC $45 CALL (HOLX151218C45) entry $1.50

08/17/15 triggered @ $42.65
Option Format: symbol-year-month-day-call-strike

Total System Services, Inc. - TSS - close: 48.23 change: +0.09

Stop Loss: 45.85
Target(s): To Be Determined
Current Gain/Loss: +0.4%
Entry on August 14 at $48.05
Listed on August 12, 2015
Time Frame: Exit 6 to 9 weeks.
Average Daily Volume = 969 thousand
New Positions: see below

08/17/15: TSS bounced off its morning lows and managed to eke out another gain and another new high. I would still consider new positions at current levels.

Trade Description: August 12, 2015:
TSS is probably one of the best performing stocks in the S&P 500 this year. The S&P 500 index is up +1.3% year to date. The financial sector is up +1%. Yet TSS has surged +39% in 2015 and shares look poised to keep running.

TSS is in the financial sector. According to the company, "As one of the world's largest payment solutions and services companies, TSYS believes payments should revolve around people, not the other way around. Since we got our start in the payments space more than 30 years ago, we have evolved from a supporting role servicing several hundred bank card issuers and bank acquirers to directly touching hundreds of thousands of merchants and millions of consumers.

TSYS is a global, publicly traded company with operations in more than 80 countries, including many of the world’s most high-growth emerging markets. We provide electronic payment services to financial institutions and companies around the globe with a broad range of issuing and acquiring payment technologies, including consumer, credit, debit, healthcare, loyalty, prepaid, chip and mobile payments."

Earnings are supposed to be the main driver behind stock price appreciation. TSS has not disappointed. The company has beaten Wall Street's estimates on both the top and bottom line the last three quarters in a row. Revenues have grown +8.9%, +11.7%, and +15.1%, respectively over the last three quarters.

TSS' most recent earnings report was July 28th. They announced their Q2 results were $0.58 per share. This was a +29% improvement from a year ago and five cents above expectations. Management then raised their 2015 guidance.

Since this late July earnings report shares of TSS have been consolidating sideways in the $46-48 range and essentially ignoring the market's recent volatility. Shares displayed some relative strength today and we want to be ready to hop on board if TSS can breakout. Tonight we're listing a trigger to open bullish positions at $48.05.

- Suggested Positions -

Long TSS stock @ $48.05

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

Long NOV $50 CALL (TSS151120C50) entry $1.20

08/14/15 triggered @ $48.05
Option Format: symbol-year-month-day-call-strike

21Vianet Group, Inc. - VNET - close: 21.41 change: +0.75

Stop Loss: 19.80
Target(s): To Be Determined
Current Gain/Loss: +3.2%
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

08/17/15: Great news! VNET displayed relative strength today (+3.6%) and broke through resistance at the $21.00 level.

VNET is scheduled to report earnings on August 26th. We plan to exit before their announcement.

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

08/15/15 new stop @ 19.80
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

GATX Corp. - GMT - close: 50.38 change: +0.35

Stop Loss: 50.65
Target(s): To Be Determined
Current Gain/Loss: -2.1%
Entry on August 12 at $49.35
Listed on August 11, 2015
Time Frame: Exit 4 to 6 weeks
Average Daily Volume = 334 thousand
New Positions: see below

08/17/15: We are cutting our losses on GMT. The stock spiked lower this morning only to bounce near last week's low. Shares rallied back to a +0.69% gain. Tonight we are suggesting an immediate exit tomorrow morning.

- Suggested Positions -

Short GMT stock @ $49.35

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

Long SEP $50 PUT (GMT150918P50) entry $2.45

08/17/15 prepare to exit tomorrow morning
08/15/15 new stop @ 50.65
08/12/15 Caution: GMT has produced a bullish engulfing candlestick reversal pattern.
08/12/15 triggered @ $49.35
Option Format: symbol-year-month-day-call-strike

Marathon Oil Corp. - MRO - close: 17.36 change: +0.17

Stop Loss: 19.55
Target(s): To Be Determined
Current Gain/Loss: +2.5%
Entry on August 14 at $17.80
Listed on August 13, 2015
Time Frame: Exit
Average Daily Volume = 7.8 million
New Positions: see below

08/17/15: Crude oil sank to new relative lows this morning and this pressured energy stocks lower. I will point out that MRO's gap down this morning was a reflection of the stock trading ex-dividend for MRO's quarterly 21-cent dividend.

No new positions at this time.

Trade Description: August 13, 2015:
Falling crude oil prices are crushing oil-sector stocks. A -50% drop in crude oil that began in the second half of 2014 was horrendous for the U.S. and global oil industry. Oil managed a bounce off its March 2015 lows but that rebound has failed.

Since late June the price of oil has fallen about -30%. Today saw crude oil close near $42.00 a barrel, the lowest since March 2009 (during the bear market in stocks).

Shares of MRO are getting hammered on this oil slide. According to the company, MRO is a global energy company. They explore for, produce, and market oil and natural gas. They are also involved in the oil sands mining in Canada and the big shale oil and gas basins in the United States. The company has operations in Angola, Equatorial Guinea, Ethiopia, Gabon, Kenya, Libya, Norway, the United Kingdom, and the Kurdistan region of Iraq.

There are a ton of factors impacting crude oil and the energy sector. OPEC's largest producer, Saudi Arabia, has decided keep production high. They would rather suffer low oil prices than lose market share to rival producers.

According to CNBC today, "OPEC's second-largest producer, Iraq, plans to export near-record volumes of Basra crude in September, adding to an already oversupplied market." Plus, "The U.S. Energy Information Administration also said on Thursday that Iran's release of oil held in storage could boost global supplies by 100,000 barrels per day this year, and that it had the 'technical capability' to boost output by 600,000 bpd by the end of next year."

If that wasn't enough the recent focus on China is undermining oil prices. China is one of the largest, if not the largest, consumer of commodities on the planet. Their economy has been slowing down for years. The central bank of China's decision to devalue their currency this week stokes fears that China's economy is falling even faster than previously expected. That doesn't bode well for China's future oil demand.

Meanwhile back at home in the U.S. we see crude oil inventories building. Wall Street is worried that domestic oil companies have not cut their spending budgets enough. There is growing concern that MRO may have to slash its dividend. The plunge in MRO's stock price has boosted its dividend yield to more than 4%.

A quick look at MRO's last few earnings reports shows the trend in revenues. Their Q3 2014 results saw revenues fall -5%. Q4 results saw revenues drop -16% from the prior year. Their Q1 2015 report said revenues plunged -46%. Their most recent report, their Q2 report on August 5th, said MRO's revenues dropped -47.9% to $1.53 billion. The company reported a loss of ($0.23) per share. Management has been slashing their budgets and cutting expenses but it wasn't enough.

The last few days have seen MRO's stock hovering above short-term support at $18.00. Unfortunately today's drop (-5.45%) left shares poised for a breakdown. Tonight we are suggesting a trigger to launch bearish positions at $17.80. We're not setting a target tonight but I will point out that the point & figure chart is bearish and forecasting at $5.00 target.

FYI: MRO does have a 21-cent dividend coming up. The stock will trade ex-dividend in the August 17-19th time frame.

- Suggested Positions -

Short MRO stock @ $17.80

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

Long OCT $17 PUT (MRO151016P17) entry $1.03

08/17/15 began trading ex-dividend today ($0.21)
08/14/15 triggered @ $17.80
Option Format: symbol-year-month-day-call-strike

Whiting Petroleum - WLL - close: 18.94 change: -0.24

Stop Loss: 20.35
Target(s): To Be Determined
Current Gain/Loss: +4.6%
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

08/17/15: WLL continued to fade lower and shares underperformed the broader market with a -1.25% decline.

I am not suggesting new positions in WLL 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