THE RHODES REPORT CAPITAL MARKET COMMENTARY 11, FORECAST. Gold Futures (Daily) At a Critical Juncture

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1 T T Telephone: richard@rhodes-capital.com Web Address: WEDNESD 213 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 1366; and the standard 2-dma support level at 168. 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 Gold Futures (Daily) At a Critical Juncture 1-DMA BLI: 4-Period (.732) BLI: 14-Period (4.4686) Gold 1 Troy Oz. COMEX Continuous That said, today begins a very small onslaught of data on the US ECONOMIC FRONT. The MBA Mortgage Applications Survey was released, and once again the recent rise in interest rates has pushed the overall index figure down -13.% a very sharp decline indeed. The purchase component of the report fell -3.%, which isn t unexpected really given that the average 3-year mortgage rate has risen to 4.8% from 4.73%...which is 12 bps higher since early May. 1 6-DMA 1 The rally failed at the1-dma, and is now hard upon 14 the rising 14 trendline off the lows and the rising 6-dma. A breakdown below these levels would suggest a test 13 of the 13 lows. The probability attached to just such a decline is very high given the 4-day model is starting 12 to roll over from less than overbought levels. 12 pr May Jun Jul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov But the real damage to the housing market is from the impact from declining mortgage refinancings. The refinancing component of this index in the past week fell by -2.%, which puts it back to its lowest level since June- 29. We ve included a chart of this on page CAPITAL MARKET COMMENTARY WORLD MARKETS ARE FLAT THIS MORNING after last night s speech by US President Obama regarding the Syrian situation. Quite simply, the President made his case for striking Syria militarily in something more than a pin-prick a phrase that we will hear more and more in the English lexicon. However, he is guardedly watching the just how the Russian proposal, and Syrian acceptance of their proposal to turn over to an international team all of their chemical weapons for destruction. Like Ronald Regan used to say: trust, but verify. This is why the military option remains on the table pending approval by Congress of course. This keeps alive one more juggling ball for the markets participants, whom continually want to focus upon anything else other than the economy for the story there isn t one that newsworthy. RCM T OVERNIGHT PRICES Quotes at: 7:31am EST INDEX LAST DAILY CHG CHG % YTD YTD % Morning Futures S&P up 1, Nasdaq 1 up 3, year Note Yield up 2.96% 4. bps Crude Oil down $ 18.1 $ (1.37) Euro down Yen down Gold down $ 1,369.7 $ (17.) Foreign Indices Japan Nikkei 22 up 14, % 4, % SSE China Composite up 2, % % German DAX up 8, % % Spain Madrid General up % % Italy FTSE MIB up 17, % 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 WEDNESD 213

2 CAPITAL MARKET COMMENTARY Mortgage Applications Survey Refinancing Component 12,. 1,. 8,. 6,. 4,. 2,. tance ether turn t, the t 18-. QE isn t stimulating 2. If rates continue to rise, then we can expect refinancings to dry up even further. We haven t seen this reflected yet in the earnings or the stock prices of banks, which have benefited from the refinancing boom disproportionately. Moreover, demand for loans has to have dried up to a certain degree; hence we ll be watching carefully just how the banks trade given the worsening trend in this data. TRADING STRATEGY: Again, there is nothing new from our perspective. We believe a top has formed in the broad averages, although prices have rallied in strong, yet tepid fashion in what we believe to be a relief rally due to the tabling for the time being of military strikes in Syria. Now, prices stand at upside resistance at the 168 level; a point where weakness needs to develop if prices are to falter towards our oft-stated lower S&P target at the 13-to-16 zone which is where the long-term 1-month moving average crosses. Good luck and good trading, Richard RCM T 2 WEDNESD 213

3 S&P INDEX/ BROAD MKT INDICATORS Major Trendline Resistance S&P INDEX 6-DMA Resistance DMA 6-DMA DMA day Model 38-DEMA 13 Rising 4-day Model % Above 1-DMA Weakening % Above 2-DMA Intermediate-Term Model -DMA 1-DMA Overbought A bearish break lower 1-DMA The 1-dma breakdown is bearish ch April May June July August September November 213 February March April May June July August September Novemb S&P TECHNICAL COMMENTS NOTHING HAS CHANGED REGARDING A TOP: The overbought condition resulted in prices testing and ultimately violating the rising 6-dma...if only for a short while. Now, this moving average is rolling over, which suggests the trend is slowly changing to lower, although this won t be clear unless it is violated once again. Hence, we ll now look upon a clear breakdown of trendline suppport as confirmation that a larger decline is underway towards major support levels at the 13-to-16 zone. The rising 38-dema crosses at 13 at this point, which we do expect to be tested within the zone noted. This would put the correction in very same as the same light as the 211 summer correction, and provide the next tradable buying opportunity in late October/November time frame. RCM T TECHNICAL INDICATOR REVIEW: The 2-day and 4-day models both peaked at the +8 overbought level, and are in clear declines although the 2-day is rising in a shortterm fashion. The % of stocks above their 1-dma is back to neutral levels at the % level. The % of stocks above their 2-dma stands at 77%...up +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. 3 WEDNESD 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: $ TGT: $ 62. Entry: $ STP: 4-day BLI ( ) 4-day BLI ( ) 14-day BLI ( ) 2-day BLI (.9413) 9 2x Long 2+ year Bond 9 UltraShort CRUDE OIL ETF DMA DMA 6-DMA DMA DMA 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 May June July August September November 213 February April May June July August September Nove Russell 2 2x Short TWM Last: $ 1.7 TGT: $ 19. Entry: $ 1.96 STP: Last: TGT: Entry: STP: 4-day BLI ( ) 14-day BLI (.234) UltraShort RUSSELL 2 ETF DEMA DMA 2 The distance below the 18-2 dema is quite large, and thus we ll expect mean reversion higher to develop. 2 1 ul Aug Sep Oct Nov Dec 213 Feb Mar Apr May Jun Jul Aug Sep Oct Nov 1 RCM T 4 WEDNESD 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 (.6) 24.1% $ 46,96 $ 31.9 $ $ (,) -11.7% "H" $ /9/13 L yr Bond 2x Long TMF (.11) 9.4% $ 18,119 $ $ $ (2,24) -11.2% "H" $ /1/13 L 6,811 Russell 2 2x Short TWM (1.43) 9.7% $ 18,728 $ 1.96 $ 1.7 $ (6,66).6% "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 (2.19) 93.2% $ 173,812 $ (13,89) "<" Denotes Change 213 RECAP Starting Balance $ 21,13 "T" = TRADE Closed Positions $ (24,833) "C" = CLOSE Open Positions $ (13,89) "E" = EXIT Dividends $ 177 "H" = HOLD PORTFOLIO YTD (Gain/Loss) $ 171,884 $ (38,246) -18.2% S&P YTD 18.8% 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. 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. RCM T WEDNESD 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. RCM T 6 WEDNESD 213