THE RHODES REPORT CAPITAL MARKET COMMENTARY FORECAST. S&P 400 Mid-Cap Index (Weekly) A Retest of the Highs

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1 T R Telephone: richard@rhodes-capital.com Web Address: WEDNESD ULY 1, 1, 213 S&P 4 Mid-Cap Index (Weekly) A Retest of the Highs 4-BLI Model ( ) We view the current market environment 13 S&P 4 CASH much 13 in the same as the July-211 period, 12 where 12the retest failed and a rather sharp 11 decline 11 ensued. Failed Restest of the Highs FORECAST STOCKS: The world economy is weakening: the US payroll tax increase and sequestration are pressuring the US economy; China is being pressured by Japan, and has dampened their housing market. the Eurozone remains mired in inaction. For now, although we feel that risk is being mispriced at current levels given recent pressure upon world economic figures and the developing pressure upon corporate margins/ earnings the consensus is that the world s central banks will save the day. STRATEGY: The S&P remains above the 16-wma long-term support level at 1333; and the standard 2-dma support level at 111. But perhaps more importantly, the distance above the 16-wma has has now faltered below the +23% bubble-like rally threshold. This is a warning sign to be sure; especially given 16 was violated to the downside. Failed Restest of the Highs?? ness is likely to cause China to miss their stated GDP growth target of 7.%...the first miss in 1-years. Of course traders reacted in Pavlovian manner by expecting more stimuli or a relaxing of the credit squeeze. Quite simply, this isn t going to be the case as China is attempting to wring the speculative juices from their economy and they are succeeding. We are willing to bet that they are willing to tolerate lower growth figures right now for future stability WMA SMA: 6-W Upper: 2% Lower: 2% European bourses for their part, opened higher, and are now trading lower. The losses are led by the southern European bourses of Spain, Portugal and Italy, which we don t find surprising, for these three countries are the beta of Europe i.e. meaning they should outperform on the upside, and underperform CAPITAL MARKET COMMENTARY WORLD MARKETS ARE LOWER ON BALANCE as today s trade until 2pm ET is considered to be squaring action as the Fed will release the minutes of the June FOMC meeting. In Asia, Japan closed higher, while China closed higher of course this is due to the market s hope that monetary stimulus will be forthcoming given overnight reports that June exports and imports declined rather sharply when they were expected to rise imports were expected to rise by +8.%, but fell by -.7%; exports were expected to rise by +4.%, while the figure printed a loss of -3.1%. These figures were really horrid and rather stark surprises to the market, as the declines were broad-based and not related to one category or another. This ubiquity of weak- RCM T OVERNIGHT PRICES Quotes at: 7:7am EST INDEX LAST DAILY CHG Morning Futures S&P down 1, Nasdaq 1 down 2, year Note Yield up 2.63% -1. bps Crude Oil up $ 1.16 $.16 Euro up Yen up Gold up $ 1,24. $ WEDNESD CHG % ULY 1, YTD YTD % Foreign Indices Japan Nikkei 22 down 14, % 4, % SSE China up 2, % -261 ###### German DAX down 8, % 48.36% Spain Madrid down % % Italy FTSE MIB down 1, % % US Indices Dow Industrials up 1, % 2, % Nasdaq 1 up 2, % % S&P Large-Cap up 1, % % S&P 4 Mid-Cap up 1, % % S&P 6 Small-Cap up % 1 2.9% 1, 213

2 CAPITAL MARKET COMMENTARY Russell 2 Index (Monthly) Extended Feb-21 6 bottom expected. The rally continues to extend, and in many regards is overextended at current levels. Our interest stems upon weakness from current levels. If a key reversal lower can print on a daily basis, then we ll look at getting short...but a monthly close below 942 would confirm a bull market high, with a RUSSELL 2 CASH INDEX 2-MMA 73-Month Cycle DUE in Feb on the downside as they are more levered to rising/falling interest rates than their northern brethren such as Germany. ON T US ECONOMIC FRONT: This morning, the MBA Mortgage Applications Survey was released, and it fell once again as higher interest rates impact the housing market. The overall index fell by -4.1%, with the purchase component down by -3.4%, with the refinancing component down -4.%. The 3-year mortgage rate rose to 4.68% from 4.8%. Quite simply, expect these 1 9 figures to get worse in the coming weeks given the 9 8 recent rise in interest rates once again Moving on, the world is really waiting for the June FOMC minutes to be released at 2pm ET. We expect the minutes to show an overtly strong bias among Fed officials to taper, which forced Dr. Bernanke to indicate at his press conference for the first time that tapering the slowing the pace of Fed asset purchases could begin later this year if growth, inflation, and the labor market meet FOMC expectations. Of course the June employment report just released 2 increases the likelihood that the Fed will move forward with an announcement that it will begin tapering of its bond purchases at the September 18 FOMC meeting. We expect they shall taper to $6 billion/month versus the current $8/billion. Also of interest is that Dr. Bernanke at the June press conference was that for the first time, he tied terminating further asset purchases to a specific labor market threshold of an unemployment rate of 7.%. Moreover, he said that threshold could be reached by mid-21; and that this new guidance represented the consensus of the FOMC. The trend is inexorably lower, and China s credit squeeze continues to bite. We expect this, coupled with the Fed tapering to result in a higher USD, and lower comodity prices. To add more fuel for trading fodder Dr. Bernanke will speak after the markets close at a National Bureau of Economic Research Conference on the topic of A Century of U.S. Central Banking: Goals, Frameworks, Accountability. The kicker is that the chairman is expected to release prepared remarks as well as take questions from the audience. Can one say volatility?? TRADING STRATEGY: Nothing has changed we are in a wait-and-see mode for the general stock market. But today come very well be a seminal reversal day in a number of markets if the FOMC minutes are viewed hawkishly as we expect. For the moment, RCM T 2 WEDNESD ULY 1, 1, 213

3 CAPITAL MARKET COMMENTARY we are not terribly impressed by the current rally, for it has lacked buying enthusiasm, and the recent bottom did not materialize from a significantly oversold condition. In fact, the Russell 2 has forged new all-time highs, whereas the S&P and NASDAQ 1 are below their recent highs a major divergence. One can add in the Transports as well. Thus, there is risk in putting money to work at the present time, and certainly in the next few weeks appears challenging given the prospects for risk-off if the Fed does look to taper in September. If we had to venture our next positions, then we would posit that a reversal lower today in the right form as a signal to begin considering short index positions. Be prepared. That said, shorting opportunities remain in the commodity and currency markets given the ECB dovish comments amid a period of rising European bond yields. Too, US bond yields are rising, which is causing real rates to turn positive from negative in a very short period of time, and is always and everywhere negative for both commodities and currencies. This hasn t yet been reflected in the all commodity and currency markets just yet, but suffice to say it is only a matter of time given the long-term trend in yields has changed from lower to higher. Good luck and good trading, Richard RCM T 3 WEDNESD ULY 1, 1, 213

4 S&P INDEX/ BROAD MKT INDICATORS Major Trendline Resistance 3-DMA S&P INDEX Bearish key reversal lower 6-DMA Forecast TR breakout is holding DMA DEMA day Model Negative 4-day Model % Above 1-DMA Declining Near overbought % Above 2-DMA Intermediate-Term Model -DMA 1-DMA Key 1-dma being retested 1-DMA The 1-dma has been violated in bearish fashion ch April May June July August September November December 213 February March April May June July August Septem S&P TECHNICAL COMMENTS T TECHNICAL CONDITION REMAINS MOD- ESTLY NEGATIVE given the key reversal lower at the May high extended below the important support zone between Now, this major resistance zone has been regained from below, and while long positions should be considered once should take it with a grain of salt given that recent advancing volume figures show a lackluster rally underway. This, coupled with a number of divergences keeps us on the sidelines. At present, the declining BLI models support further declines, with further technical damage wrought with the % of stocks above their 2-dma trading right at its -dma and 1-dma. The unfortunate situation for the bulls is that these levels remain rather high, and corrections start with levels of 87% RCM T TECHNICAL INDICATOR REVIEW: The 2-day model has turned lower from negative numbers, which is rather bearish. The 4- day model remains in a decline. The % of stocks above their 1-dma is back to more neutral levels. The recent oversold condition has allowed for a countertrend rally. The % of stocks above their 2-dma stands at 83%...flat from the prior close. The 87% level has in the past marked the highs, with the -dma/1-dma breakdown raising red flags. The Intermediate-term Model is now clearly below the 1-dma; this is a bearish sign to be sure. 4 WEDNESD ULY 1, 1, 213

5 MODEL PORTFOLIO I Euro 2x Short EUO Last: $ $ - N/A Last: $ - $ - 4-day BLI ( ) 14-day BLI (.8222) 23. Euro 2x Short DMA DMA DMA 18. The head 18. & shoulders bottom is on the verge of breaking out given the models 17. positions. We are buyers today. Forecast May Jun Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep N/A Last: $ - $ - N/A Last: $ - $ - RCM T WEDNESD ULY 1, 1, 213

6 MODEL PORTFOLIO POSITIONS I Crude Oil 2x Short SCO Euro 2x Short Last: $ TGT: $ 61. Entry: $ 31.9 STP: $ - EUO Last: $ TGT: $ - Entry: $ 19.9 STP: $ - 4-day BLI ( ) 2-day BLI ( ) Major support is being tested, with 6 given the positive model divergence suggests it shall hold. Buy. 3-DMA UltraShort CRUDE OIL ETF 6-DMA DMA Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep N/A Last: $ - TGT: $ - Entr y: $ - STP: $ - N/A Last: $ - TGT: $ - Entr y: $ - STP: $ - Forecast RCM T 6 WEDNESD ULY 1, 1, 213

7 TRR MODEL PORTFOLIO: PAID-TO-PLAY No. Trade Date POS Share No. Name SYM Beta Port % Invest Entry Price Current Price Unrealized P/L Percent P/L Stop Loss Point TARGET EARN DATE 1 7/8/13 L 1,472 Crude Oil 2x Short SCO (.66) 24.7% $ 46,96 $ 31.9 $ $ (67) -1.4% $ - < $ 61. N/A 2 7/9/13 L 1,411 Euro 2x Short EUO (.18) 1.% $ 28,82 $ 19.9 $ $ 8.3% $ - < 3 N/A.% $ - $ - $ - $ -.% $ - 4 N/A.% $ - $ - $ - $ -.% $ - N/A.% $ - $ - $ - $ -.% $ - 6 N/A.% $ - $ - $ - $ -.% $ - 7 N/A.% $ - $ - $ - $ -.% $ - 8 N/A.% $ - $ - $ - $ -.% $ - 9 N/A.% $ - $ - $ - $ -.% $ - 1 N/A.% $ - $ - $ - $ -.% $ - 11 N/A.% $ - $ - $ - $ -.% $ - 12 N/A.% $ - $ - $ - $ -.% $ - 13 N/A.% $ - $ - $ - $ -.% $ - 14 N/A.% $ - $ - $ - $ -.% $ - 1 N/A.% $ - $ - $ - $ -.% $ - TOTAL (.8) 39.8% $ 7,48 $ (8) "<" Denotes Change 213 RECAP Starting Balance $ 21,13 "T" = TRADE Closed Positions $ (22,42) "C" = CLOSE Open Positions $ (8) "E" = EXIT Dividends $ 177 "H" = HOLD PORTFOLIO YTD (Gain/Loss) $ 187,31 $ (22,829) -1.86% S&P YTD 1.86% Over/(Under) Performance % TRADE PRICE NOTE: All entry and exit prices for stocks are the average of the high and low prices for the trading day as provided for byyahoo! s website at unless clearly stated in the trade instructions below. DISCLAIMER: "The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' securities, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. The illustrations and charts in this report are educational only and do not take into consideration your personal circumstances or other factors that may be important in making investment decisions. This report is not a recommendation to buy or sell a particular security. TRADE ORDERS: TRADE EXECUTIONS: 1. Euro 2x Short (EUO) buy a 1% long position. 1. Crude Oil 2x Short (SCO) bought a 2% long position at an average of $31.9. The Rhodes Report is published by Rhodes Capital Management, Inc. Mailing address: 111 Presidential Blvd. Suite 13; Bala Cynwyd, Pennsylvania 194. All contents copyright Rhodes Capital Management, Inc. Reproduction, retransmission or redistribution in any form is illegal and strictly forbidden, as is regular dissemination of specific forecasts and strategies. Otherwise, feel free to quote, cite or review if full credit is given. The Rhodes Report is published daily, including special reports as market conditions warrant. Correspondence is welcome, but volume of often precludes a reply. Subscription rates are: $279/annually or $19/six-months. Visa, MasterCard and American Express accepted. Delivery is available via Internet download and . This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. The report is published for informational purposes and is not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The report is based on information obtained from sources believed to be reliable, but is not guaranteed as being accurate, nor is it a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without any notice and The Rhodes Report is not under any obligation to update or keep current the information contained herein. Past performance is not necessarily indicative of future results. The Rhodes Report accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. RCM T 7 WEDNESD ULY 1, 1, 213

8 The Blue-Line Indicator or BLI Explained The BLI is our simple momentum oscillator used for timing and trend decisions; we rarely if ever use other momentum indicators for we prefer to focus and understand one indicator really well rather than a basket of indicators that can at times be contradictory. Furthermore, we prefer to use the BLI in conjunction with basic chart patterns; it is our experience that this combination works rather well for type of trading style. Basically, the BLI it is a full stochastic indicator derivative of our own undertaking; our changes have been several, but primarily relate to smoothing the indicator in order to provide for better signals once it does in fact change directions. We use varying time periods dependent upon whether we are working with weekly or daily charts. We have found that a 14- period BLI works well with the weekly charts, whereas both a 2-period and 4-period work well with daily charts. Obviously, the 4-period BLI catches longer and more tidal changes in direction. We normally don t use these in our Daily Bulletin given its shorter-term time frame, but behind the scenes it plays a big part. When using the BLI with price charts; we look upon the following 3-factors as set-ups upon which the probability is highest to trade: 1. BLI Extremes: Oversold (-6 to -8)/Overbought (+6 to +8) When the BLI trades into either extreme, our reversal ears go up as a change in trend becomes a higher probability. This puts the risk/reward dynamic in our favor generally, but we won t take a position without well defined stop losses and perhaps prices are trading into support or resistance as the case may be. However, we must note that extreme conditions can and will become more extreme in a powerfully trending market; hence this is the caveat to trading with the BLI in isolation. 2. BLI Divergences: Positive/Negative A divergence is said to have occurred when the price and BLI do not make new lows/highs together. They in effect diverge, with the BLI not confirming the prevailing trend. If the BLI turns higher/lower from below a previous BLI low/high then a divergence is said to have occurred, of which the probability is increased that the trend is changing in favor of the BLI direction. 3. BLI Reversals from Positive/Negative Levels Another very good BLI trading pattern which denotes a strongly stock is when the BLI turn higher from already positive levels this suggests a strong upwards acceleration is underway. Conversely, a turn lower from already negative numbers suggests a strong downward acceleration is underway. RCM T 8 WEDNESD ULY 1, 1, 213