THE RHODES REPORT CAPITAL MARKET COMMENTARY FORECAST. Dow Jones Index (Daily) Watch Trendline Support

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1 16 T R Telephone: richard@rhodes-capital.com Web Address: AY O F 14 level; but not until then. Patience Dow Jones Index (Daily) Watch Trendline Support Dow Jones Industrials A top grows closer to fruition, with lower 1 trendline support the final arbiter between a consolidation 1 and a correction back to the 4-dma. Certainly we would be interested buyers at that FORECAST STOCKS: The world economy is muddling through: the US payroll tax increase and sequestration are headwinds to the US economy; China is being pressured by Japan, and both the US and China housing market are weakening. The Eurozone remains mired in inaction, athough showing 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. At some point, the market will view the central banks will be non-sequitur. STRATEGY: The S&P remains above the 16-wma long-term support level at 1382; and the standard 2-dma support level at 19. But perhaps more importantly, the distance above the 16-wma falied at the +23- to +2% zone that is our bubble-like rally threshold. Hence, a correction of some proportion is forthcoming perhaps -1% or more October 213. An alternative release date has not been scheduled. So, without further ado, the Fed is going to have speakers stand in for the report, and given their remarks in a number of issues. We find it curious that it takes -Fed speakers to equal 1-US Employment Situation Report; and would in the future like to explore the calculus of comparing various Fed speakers to other reports especially if the government appears as if it never going to open again x1 4-DMA J A 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 x1 That said, today s headliner and beginning act is Dallas Fed President Fisher at 8:3am ET, and he shall speak on the economy. He is a hawk, and therefore he will say that the Fed should have tapered, and that the government is in disarray, and that Fed policy CAPITAL MARKET COMMENTARY WORLD MARKETS ARE ON BALANCE HIGR THIS FAY as weary market participants are sick and tired of having the US government shutdown the front and center news if you will, and of selling the various markets down on its continued closure. This morning, it is a day of protest to the upside, and markets are moving very modestly higher. Now, this calm could break at any time, for many traders had looked forward to the US employment situation report due out at 8:3am ET. The Labor Department has delayed it: Due to the lapse in funding, the Employment Situation release which provides data on employment during the month of September, compiled by the U.S. Department of Labor s Bureau of Labor Statistics, will not be issued as scheduled on Friday, OVERNIGHT PRICES Quotes at: 7:4am EST INDEX LAST DAILY CHG CHG % YTD YTD % Morning Futures S&P up 1, Nasdaq 1 up 3, year Note Yield up 2.62% 2. bps Crude Oil up $ $.42 Euro down Yen up Gold down $ 1,31.8 $ (1.8) Foreign Indices Japan Nikkei 22 down % 3, % SSE China Composite up 2, % % German DAX down 8, % % Spain Madrid General up % % Italy FTSE MIB up 18, % 1, % US Indices Dow Industrials down % 1, % Nasdaq 1 down 2, % % S&P Large-Cap down 1, % % S&P 4 Mid-Cap down 1, % % S&P 6 Small-Cap down % % 1 F AY O 213

2 CAPITAL MARKET COMMENTARY NASDAQ 1 Index (Daily) Back-into-a-Corner NASDAQ 1 INDEX The 33 apex of trendlines has come into play, and prices are compressing. There will be a 32 breakout one way or the other, but the risk- 31 reward suggests it shall be lower in terms of a mean 3 reversion excercise DMA 4-day BLI (7.4224) 14-day BLI (6.7822) able top to form. Perhaps this showdown between the Congress and the President will push prices sharply lower towards the mean reversion lev- els of 11-day, the 2-day, and perhaps the 38- d a y moving averages. Thus far, this isn t being seen as a problem for the markets, although we have begun to witness some tacit weakening of stock prices, b u t more weakening in the indicators and deteriorating models that suggest the internal fuel needed to push 33 the market higher is weakening and thus we 32 remain on point for our topping call for the time But we remain cognizant that market participants buy em on the resolution of anything the only tion is whether it will be from one of the afore- tioned support levels. 31 being. 3 like to 29 ques- 28 men DEMA 2 2-DMA shouldn t be considered a substitute for bad government. Shortly thereafter, we ll hear from NY Fed President Dudley at 9:1am ET, who is a bit more staid to be sure, for he toes the company line regardless he is giving the opening remarks to a conference. Then, at 9:3am ET, Fed Governor Stein graces the podium, but his speech is likely to be rather dull, as it speaks about Fire Sales and Security Financing Transactions. This is the way we ve read it; we could be wrong, but then again nothing surprises us any longer. Afterward, there is a Fed respite, with Atlanta Fed President Lacker speaking at 12:3pm ET. He is as near a hawk as you can get, will speak on human capital. This reminds us of the Dow Chemical commercial regarding Hu human capital. And finally, we ll end Friday with Minnesota Fed President Kocherlakota speaking at 1:4pm ET on monetary policy. To give some color here, we should posit that Ms. Kocherlakota stands just about where Mr. Lacker stands on the near-hawkish side, hence her comments are likely to resonate on the same terms as Mr. Fisher s comments early this morning. TRADING STRATEGY: For the past 2-months, we believed the time frame and challenges were ripe for a trad- 2 and Apr May Jun Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 214 Feb 26 Having said this, we ll look at various portfolios option strategies to take advantage of this beginning with next week, for we are going to change up the letter just a bit to reflect long-only portfolios and a tactical option portfolio. Stay tuned, the letter is about to get back to its roots in quite a few different ways. Good luck and good trading, Richard 2 F AY O 213

3 S&P INDEX/ BROAD MKT INDICATORS S&P INDEX Major Trendline Resistance 3-DMA 11-DMA Key Support at DMA DEMA day Model Declining 4-day Model Possible bearish ledge % Above 1-DMA Neutral 9 8 resistance DMA -DMA DMA ch April May June July August September November 213 February April May June July August September November % Above 2-DMA Intermediate-Term Model MA cross proving The 1-dma has nacently crossed above the 1-dma S&P TECHNICAL COMMENTS NOTHING HAS CHANGED REGARDING A TOP: The recen t downside test of the 11-dma was ultimately successful, with the Fed decision surprise pushing prices into trendline reisstance a point that has proven its merit with weakness as a majority of our models indicate beneath the surface weakness. This loss of momentum however, will not be clear until the 11-dma is violated at 166. For the moment, the 2-day model is clearly declining from overbought levels, which is the first trend change sign. Major support at the 2-dma crosses at 192, which is just above rising trendline resistance that was broken above in March For a number of years, this resistance level had acted as resistance; but now it acts as support, and will likely provide for next possible buying opportunity. The 14-day model is decling, with the 4- day model losing momentum. If the 4-day turns lower in negative divergence, then certainly a larger correction will be underway. The % of stocks above their 1-dma is back to neutral levels at the % level. The % of stocks above their 2-dma stands at 7%...down -1% from the prior close. The 87% level marked previous highs. The -dma/ 1-dma cross breakdown now confirms a larger correction. Bottoms form between 3%-4%. The Intermediate-term Model has broken below the 1-dma; a clear bearish signal. However, it is challenging this level once again. 3 F AY O 213

4 MODEL PORTFOLIO POSITIONS I Crude Oil 2x Short SCO 3-yr Bond 2x Long Last: $ TGT: $ 61. Entry: $ 31.9 STP: TMF Last: $ 48.8 TGT: $ 62. Entry: $ STP: 4-day BLI ( ) 4-day BLI ( ) 14-day BLI (3.868) 2-day BLI ( ) 9 2x Long 2+ year Bond 9 UltraShort CRUDE OIL ETF DMA 8 8-DMA 6-DMA DMA 6 3-DMA 6 4-DMA The 14-day model has turned higher; hence a 3 mean reversoin excercise is underway. 3 The decline is far below all the moving averages; which given 4 the model setups...argue for mean reversion higher. 4 Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec May June July August September November 213 February April May June July AugustSeptember Novembe Russell 2 2x Short TWM Last: $ 14.6 TGT: $ 19. Entry: $ 1.96 STP: Last: TGT: Entry: STP: 4-day BLI ( ) 14-day BLI ( ) UltraShort RUSSELL 2 ETF DEMA DMA 2 The distance 2 below the 18- dema is quite large, and thus we ll expect mean reversion higher to develop ul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 4 F AY O 213

5 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 1 7/8/13 L 1,472 Crude Oil 2x Short SCO (.68) 2.4% $ 46,96 $ 31.9 $ $ (3,114) -6.6% "H" $ /9/13 L yr Bond 2x Long TMF (.13) 1.3% $ 18,119 $ $ 48.8 $ (297) -1.6% "H" $ /1/13 L 6,811 Russell 2 2x Short TWM (1.37) 7.% $ 18,728 $ 1.96 $ 14.6 $ (9,3) -8.8% "H" $ %.% 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 (2.18) 93.2% $ 173,812 $ (12,964) "<" Denotes Change 213 RECAP Starting Balance $ 21,13 "T" = TRADE Closed Positions $ (2833) "C" = CLOSE Open Positions $ (12,964) "E" = EXIT Dividends $ 177 "H" = HOLD PORTFOLIO YTD (Gain/Loss) $ 172,9 $ (37,621) -17.9% S&P YTD 17.7% Over/(Under) Performance -3.61% 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. None. 1. None. 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. F AY O 213

6 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. 6 F AY O 213