THE RHODES REPORT CAPITAL MARKET COMMENTARY 21, FORECAST. 10-Year Note Yield (Daily) Overhead Resistance

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1 T R Telephone: richard@rhodescapital.com Web Address: THURSD 213 1Year Note Yield (Daily) Overhead Resistance 1DMA 8day BLI (1.7416) The 1 Y TSY 1year YLD NDX note is stuck between 2.% to3.%. The question is whether overhead resistance proves its merit; or it is given. If it has merit, then lowertosideways is the path; a breakout would lead to a spike higher. 1DEMA J A S O N D 211 A M J J A S O N D 212 A M J J A S O N D 213 A M J J A S O N D 214 A M J J A FORECAST STOCKS: The world economy is muddling through: the sequestration and continued Congressional argument regarding government closures and debt ceilings are clear headwinds to the US economy; while China is showing signs of trying to cool inflation. The Eurozone remains mired in inaction, athough showing nascent signs of growth. Quite clearly, we feel risk is being mispriced at current levels given the economic backdrop and developing pressure upon corporate revenues/margins/earnings. But, the QE pillars continue to hold prices higher than in nonqe times. STRATEGY: The S&P remains above the 16wma longterm support level at 144; and the standard 2dma support level at But perhaps more importantly, the distance above the 16wma has regained the+2% level that denotes a bubblelike rally threshold. If it expands towards 3%, then an upside explosion may be under way gram if the economy strengthens as they expect; and there continues to be an active discussion for changing the forward guidance. They further showed participants generally expected that the data would be convincing enough to warrant trimming the pace of purchases in coming months. In addition, some participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent. However, a couple of participants thought that line of reasoning was premature and that more time was needed to determine the outlook for the labor market and inflation. Still, some participants are more than a couple. Moving on, the latest minutes also showed there was a heavy focus on the strategic and com CAPITAL MARKET COMMENTARY WORLD MARKETS ARE MIXED AT THIS POINT IN TIME as yesterday s release of the Fed FOMC minutes has caused quite a stir and a bit of confusion in the capital markets. Add to this the fact that Eurozone PMI s were on the soft side of expectations as well as having declined from the previous month s figures. The clear winner overnight is Japan s NIKKEI, which rose nearly +2.% on news that a major government fund with assets of $2 trillion will invest more of their funds in risky assets. Also as a result of this news, the Japanese Yen fell rather sharply and as the lead chart on page 2 illustrates further weakness will precipitate a virtual freefall over the 18months. FOMC MINUTES: The latest minutes showed the Committee clearly has a bias to reduce its asset purchase pro RCM T OVERNIGHT PRICES Quotes at: 7:7am EST INDEX LAST DAILY CHG CHG % YTD YTD % Morning Futures S&P up 1, Nasdaq 1 up 3, year Note Yield up 2.79% +. bps Crude Oil up $ $.32 Euro up Yen down Gold down $ 1,248.6 $ (9.) Foreign Indices Japan Nikkei 22 up 1, % 4, % SSE China Composite down 2,26 1..% % German DAX down 9, % 1,7 2.46% Spain Madrid General down % % Italy FTSE MIB up 18, % 2,3 1.38% US Indices Dow Industrials down 1, % 2, % Nasdaq 1 down 2, % % S&P LargeCap down 1, % % S&P 4 MidCap down 1, % % S&P 6 SmallCap down % % 1 THURSD 213

2 CAPITAL MARKET COMMENTARY Prices are sitting hard upon rising 14 trendline support. A clear breakdown looms ahead, with sharply lower prices ahead. Note the cycle is due to bottom in April Japanese Yen (Monthly) Major Bearish Wedge 8MMA Price Oscillator ( ) JPANESE YEN Continuous As expected, there was also a lot of discussion of other ways to clarify its forward guidance and remain accommodative for a long time. Indeed, participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep shortterm rates low or reinforce the forward guidance on the federal funds rate. For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions x x In the end, the minutes highlighted that no decisions surrounding these issues were reached and that members agreed to continue reviewing these issues at upcoming meetings. munication issues associated with the Fed s QE and the various possibilities for clarifying or strengthening its forward guidance for the funds rate. FOMC members were clearly frustrated with the backup in interest rates in the wake of the June FOMC meeting, when Dr. Bernanke laid the groundwork for dialing back QE. The minutes showed the Fed continues to explore ways it can change its mix of tools and distinguish between tapering and focus on keeping the funds rate low for long period of time. The minutes also provided some guidance as to how policymakers could eventually taper the asset purchase program: A number of participants believed that making roughly equal adjustments to purchases of Treasury securities and MBS would be appropriate and relatively straightforward to communicate to the public. However, some others indicated that they could back trimming the pace of Treasury purchases more rapidly than those of MBS, perhaps to signal an intention to support mortgage markets, and one participant thought that trimming MBS first would reduce the potential for distortions in credit allocation. ON T US ECONOMIC FRONT: This morning we ve seen the release of the weekly jobless claims figures and they are betterthanexpected dropping to +323k from a revised prior week s +344k. The consensus was for a drop to +33k. Also the PPI came in as expected: the overall figure printed.2%, while the core rate rose by +.1%. Lastly, the Markit US PMI preliminary report for November printed a bit hotter than anyone expected printing 4.3 versus the consensus of 2.4 and the prior month s 1.8 reading. Also to note today: a number of Fed speakers once again. First, we ll hear from Fed Governor Powell, who will speak on the overthecounter derivative market. Next at 12:3 and 1pm ET, we ll hear from Mr. Bullard of the St. Louis Fed and Mr. Lacker of the Richmond Fed both upon the economy and monetary policy. TRADING STRATEGY: Nothing has changed in our minds. The S&P has just broken out above the recent sideways trading range of the past two weeks; but it has done so without other important indices creating a myriad of divergences across the technical landscape. We must respect them, for the probabilities favor these divergences proving challenging for further market gains. Thus, given the riskreward continues to be skewed towards selling RCM T 2 THURSD 213

3 CAPITAL MARKET COMMENTARY rather than aggressive buying we are a bit more patient to layer in additional short positions for the Short Corner. However, having said this, the Chinese market now interests us from a technical perspective given the past several days of strong gains that did hold major support levels and is challenging resistance. We just added the China ETF (FXI) to the Institutional Model Portfolio. We ll even consider Chinese equities in the week ahead. Also this morning, we want to add Encana (ECA) to the IMP. The technicals are starting to warm up, and a bottoming process seems complete. And to reiterate, this longonly portfolio is slowly, but surely accumulating good riskreward positions for a longerterm time horizon of 612 months or even longer as the case may be. As more become available on a correction, we ll likely fill it out quite a bit faster. RCM T 3 THURSD 213

4 S&P INDEX/ BROAD MKT INDICATORS 18 S&P INDEX Major Trendline Resistance 2DMA Key Support at DMA 38DEMA 1 14 DMA 14 14day Model Peaking day Model Peaking % Above 1DMA Huge Divergence % Above 2DMA IntermediateTerm Model DMA 1DMA 1DMA MA cross proving resistance The model has broken below the 1dma er November December 213 February March April May June July August September October November December 214 S&P TECHNICAL COMMENTS RISK REMAINS HIGH AT CURRENT LEVELS: The riskreward remains skewed to the downside regardless of whether prices remain above trendline resistance, as the model group suggests a correction to the 11dma at current at 1689, of which a clear breakdown would accelerate the decline towards the wide 2dma and 38 dema range between At this point, the % of stocks above their 1dma continues to show a major divergence, which means fewer stocks are participating, and is nearly always attached to corrections. Too, the % of stocks above their 2dma has forged lower lows, and is below it s 1dma, and has also nascently broken it s dma...this is not bullish price action. The 14day and 4day models are now overbought. Now, the 14day appears to be peaking, which would certainly indicate a correction is at hand. The % of stocks above their 1dma is at the 7%level; still a major divergence with prices. The % of stocks above their 2dma stands at 7%...down 1% from the prior close. The 87% level marked previous highs. The dma/ 1dma cross breakdown now confirms a larger correction. Bottoms form between 3%4%. The Intermediateterm Model has broken back below the 1dma; and stalling, peaking and turning lower. RCM T 4 THURSD 213

5 SHORT CORNER No. Trade Date POS Name SYM Beta Entry Price Current Price 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. COMMENTS: TRADE ORDERS/EXECUTIONS: 1. None 1. Tesla (TSLA) cover short position at $19 GTC. Percent P/L Stop Loss Point TARGET EARN DATE 1 7/8/13 L Crude Oil 2x Short SCO (2.68) $ 31.9 $ % $ "H" $ 61. N/A (2.68) 1, /9/13 L 3yr Bond Yield 2x Short TMF (1.22) $ $ % $ "H" $ 62. N/A (1.22) /1/13 L Russell 2 2x Short TWM (2.39) $ 1.96 $ % $ "H" $ 19. N/A (2.39) 6, /31/13 S Tesla TSLA.67 $ $ % $ "H" $ 11. N/A /14/13 S Chipolte CMG. $ $ % $ "H" $ N/A N/A $ $.% $ $ N/A 7 N/A $ $.% $ $ N/A 8 N/A $ $.% $ $ N/A 9 N/A $ $.% $ $ N/A 1 N/A $ $.% $ $ N/A 11 N/A $ $.% $ $ N/A 12 N/A $ $.% $ $ N/A 13 N/A $ $.% $ $ N/A 14 N/A $ $.% $ $ N/A 1 N/A $ $.% $ $ N/A TOTAL (1.1) "<" Denotes Change Beta Share No. The Rhodes Report is published by Rhodes Capital Management, Inc. Mailing address: 31 Kenmore Rd, Merion Station, Pennsylvania 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/sixmonths. 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 THURSD 213

6 SHORT CORNER I Crude Oil 2x Short SCO 3yr Bond Yield 2x Shor Last: $ 3.22 TGT: $ 61. Entry: $ 31.9 STP: $ TMF Last: $ TGT: $ 62. Entry: $ STP: $ 4day BLI ( ) 4day BLI (.2331) 14day BLI (4.213) 2day BLI (7.1873) 9 2x Long 2+ year Bond 9 UltraShort CRUDE OIL ETF DMA 8 4 8DMA 6DMA DMA DMA The 14day and 4day models are rising; hence a 6dma 3 mean reversoin excercise is underway The decline is far below all the moving averages; which given 4 the model setups...argue for mean reversion higher. 4DMA 6 4 Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 214 May Jun Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 214 Russell 2 2x Short TWM Last: $ 13.8 TGT: $ 19. Entry: $ 1.96 STP: $ Tesla TSLA Last: $ TGT: $ 11. Entry: $ STP: $ 4day BLI (7.16) 4day BLI ( ) 14day BLI (3.1637) 14day BLI (7.2397) 3 3 UltraShort RUSSELL 2 ETF 3 3 The rise is parabolic, and far above any 2 reasonable moving average. In fact, the 6dma proved resistance, which 1 suggests a test of the 2dma at $19. Tesla DMA 18DEMA 2 1 4DMA 1 2 The distance below the 18 dema is quite large, and thus we ll expect 1 mean reversion higher to develop DMA 4DMA ul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 214 g Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 214 Feb Mar Ap RCM T 6 THURSD 213

7 SHORT CORNER II Chipolte CMG Last: $ TGT: $ Entry: $ STP: $ N/A Last: $ TGT: $ Entry: $ STP: $ 4day BLI (8.8466) 1 14day BLI (.997) The rising trendline remains intact; but both models have now turned lower. Hence, we are 47 taking a short position today DMA Chipolte 17DMA Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 214 N/A Last: $ TGT: $ Entry: $ STP: $ N/A Last: $ TGT: $ Entry: $ STP: $ RCM T 7 THURSD 213

8 INSTITUTIONAL MODEL PORTFOLIO N o. D ate C om pany Ticker S ector S ubindustry P ort % Comments: 1. Encana )ECA) buy a 3% position. P o r t S e c t o r % C u r r e n t Y ie ld B e t a E n t r y P r ic e C u rren t P r ic e T o t a l U n r e a liz e d P / L 1 1 / 2 2 / 1 3 T r a n s o c e a n R IG E n e r g y O il & G a s D r illin g 3.3 % 4.9 % 2. $ $ $ 3 3,4 4 7 $ 3, % $ / 2 4 / 1 3 A r c h C o a l A C I E n e rg y C o a l 3.1 % 3.1 % 2. 3 $ 4. 6 $ $ 3 1 2, 9 $ 1 2, % $ % $ $ $ $. % $ 4 M a t e r ia ls. % $ $ $ $. % $. % $ $ $ $. % $ 6. % $ $ $ $. % $ 7 Industrials. % $ $ $ $. % $ 8. % $ $ $ $. % $ 9. % $ $ $ $. % $ 1 C o n s. D is c r e t io n a r y. % $ $ $ $. % $ 11. % $ $ $ $. % $ 12. % $ $ $ $. % $ 13 C o n s. S t a p le s. % $ $ $ $. % $ 14. % $ $ $ $. % $ 1. % $ $ $ $. % $ 16 1/3/13 T e v a P harm a T E V A H e a lt h c a r e P h a r a c e u t ic a ls 3. % 2. 6 %.9 8 $ $ 4. $ 2 9 6,4 2 1 $ ( 3, ) 1.2 % $ 17. % $ $ $ $. % $ 18. % $ $ $ $. % $ 19 F in a n c ia ls. % $ $ $ $. % $ 2. % $ $ $ $. % $ 21. % $ $ $ $. % $ 22 In f o T e c h n o lo g y. % $ $ $ $. % $ 23. % $ $ $ $. % $ 24. % $ $ $ $. % $ 2 T e le c o m. % $ $ $ $. % $ 26. % $ $ $ $. % $ 27. % $ $ $ $. % $ 28 U tilitie s. % $ $ $ $. % $ 29. % $ $ $ $. % $ 3. % $ $ $ $. % $ 31 11/18/13 C hina F X I C o u n t r y E T F In d e x 4. 8 % 2. 4 %.9 1 $ $ $ 4,4 6 3 $ ( 4 4 ) 1. % $ 32. % $ $ $ $. % $ 33. % $ $ $ $. % $ 34. % $ $ $ $. % $ 3. % $ $ $ $. % $ 36. % $ $ $ $. % $ 37. % $ $ $ $. % $ 38. % $ $ $ $. % $ 39. % $ $ $ $. % $ 4. % $ $ $ $. % $ 41. % $ $ $ $. % $ 42. % $ $ $ $. % $ 43. % $ $ $ $. % $ 44. % $ $ $ $. % $ 4. % $ $ $ $. % $ 46. % $ $ $ $. % $ 47. % $ $ $ $. % $ 48. % $ $ $ $. % $ 49. % $ $ $ $. % $. % $ $ $ $. % $ T O T A L 9 3 9, $ 3 8, $ "< " D e n o te P e r c e n t P / L S T P RCM T 8 THURSD 213

9 INSTITUTIONAL MODEL PORTFOLIO I Transocean RIG Last: $ $ (.39) Arch Coal ACI Last: $ 4.23 $.6 4day BLI (6.2739) 4day BLI (2.964) 14day BLI ( ) 14day BLI (.199) 6 Transocean Inc DMA ARCH COAL DMA DMA 4.. 1DMA.. 4 The 4dma was violated to the upside, and appears to be bottoming. We find this bullish. S O N D 212 M A M J J A S O N D 213 M A M J J A S O N D 214 M A 4 4. The declining wedge is bullish, with 4. prices becoming more bullish on a breakout 3. above the 23dma. Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 214 Feb Mar Ap Teva Pharm TEVA Last: $ 4. $ 1.3 Teva Pharm TEVA Last: $ 4. $ 1.3 4day BLI (2.8127) 4day BLI 2day BLI (3.8977) 14day BLI (2.716) The 36. previous lows were violated, 36. but yesterday s trade hints a the beginning of a bottoming process. Teva 4DMA 12DMA ay Jun Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec The 38dma held the decline, 49 with the dma 48 violated to the upside. 47 Further 46 gains will allow or a 4 head & shoulders breakout DMA FTSE China 2 38DMA er November 213 FebruaryMarch April May June July August September November RCM T 9 THURSD 213

10 INSTITUTIONAL MODEL PORTFOLIO II Ecana ECA Last: $ 19.1 $.3 N/A Last: $ TGT: $ Entry: $ STP: $ 4day BLI (1.968) 14day BLI (2.4882) 26 Ecana DMA DMA 19 Trendline 18 resistance was violated, with the 4dmanow under 17 assault. We expect it to be violated to the upside. BUY Jun Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 214 N/A Last: $ TGT: $ Entry: $ STP: $ RCM T 1 1 THURSD 213

11 The BlueLine 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 2period and 4period work well with daily charts. Obviously, the 4period BLI catches longer and more tidal changes in direction. We normally don t use these in our Daily Bulletin given its shorterterm time frame, but behind the scenes it plays a big part. When using the BLI with price charts; we look upon the following 3factors as setups 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 THURSD 213