This presentation is solely for informational purposes and not a solicitation to invest. Stonehenge Analytics offers and publishes forecasts of future likely price movements of various financial assets. These are opinions formulated from our cycles-based historical analytical research. They are not, nor are they represented to be investment advice. Individuals or institutions choosing to act on these opinions are doing so at their own risk. Stonehenge Analytics does not warrant or guarantee that acting upon its published opinions will produce financial gain. Past historical performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Individuals and institutions should consult a financial advisory professional before making any investment.

Weekly Market UpdateWeek of Sept. 6-9, 2016

Big Sell-Off on Friday Sends Stocks Down for the WeekFears of Fed Tightening Blamed; Bond Yields Rise

Market-Leading Computer Technology Stock Index (XCI), Semiconductor Stock Index (SOX) Finally Turn Down

Intermediate-Term 50-day Druitt’s Oscillator Finally Turns Down---Next Week’s Market

The major U.S. stock indices took a big plunge on Friday that sent the Dow Industrial Average and the S&P 500 Index down to price levels they last visited on Friday, July 8 when both were then on their way up from their jointly-made “Brexit Vote” lows on June 27. Just to refresh memories the Dow Industrials’ intraday low on June 27 was made at the 17,063 price level and the S&P 500 intraday low that day was at 1,991.68. The Dow closed this past Friday at 18,085 and the S&P ended the week at 2,127.81. As these figures show, both major U.S. stock indices would have to continue falling by more than an additional -5.0% to match these previous lows. The June 27 intraday lows are important technical price levels because unless and until both stock indices move below them they are both still in confirmed intermediate-term upward price trends since their jointly-made lows on February 11 of this year. In other words, Friday’s steep plunge of -394 points by the Dow Industrials and -53.49 points by the S&P needs to be viewed with some perspective. At this point it is one bad day in a rising trend market. It could always turn into something more sinister and damaging, but we should require proof before jumping to that conclusion. That proof has not yet arrived, though “Weekly Update” suspects that it will arrive before mid-October. Friday’s big sell-off is being blamed on comments made by Boston Federal Reserve Bank President Eric Rosengren early that morning at a speech he delivered to a Quincy, Massachusetts economic group. Rosengren laid out a strong case for the Federal Reserve Open Market Committee resuming “interest rate normalization” at its next policy-setting meeting on September 21. “Interest rate normalization” is today’s politically correct euphemism for a much more easily understood two-word phrase, “rate hike”. In point of fact Mr. Rosengren did not say anything this past Friday that Federal Reserve Chairman Janet Yellen did not say in her August 26 speech to the annual gathering of Fed officials at Jackson Hole, Wyoming. He said it however right on the heels of the European Central Bank’s policy decision on Thursday to refrain from expanding its current “quantitative easing” program of outright purchases of both sovereign and corporate bonds and also refrain from extending that program beyond its currently-scheduled completion date in March of next year. Mr. Rosengren’s comments thus made it appear that at least two of the globe’s four major central banks were certain to be slowing down their money-printing presses simultaneously early in 2017. This made it seem like a good idea to take profits in stocks whose prices had been run upward since June 27 sooner rather than later, and Rosengren’s comments gave everyone thinking along those lines an excellent reason to pull the “Sell” trigger simultaneously. Friday’s big sell-off was accompanied by a big volume spike on the NYSE to 4.15 billion shares, a total that was higher by 700 million shares than the average volume of the first three days of the holiday-shortened week.

One week ago the “Weekly Update” displayed a 1-year chart of the S&P 500 Index that showed if it fell below its intraday “twin lows” from August 26 and September 1 that a “measured move” projection would call for it to continue to fall to the middle horizontal line on the chart below that is drawn across its two short-term price highs made on November 3 of last year and April 20 of this year at 2,116 and 2,120. Friday’s plunge to the 2,127 price level by the S&P proved that forecast to be accurate, and so we must now look at future possibilities depending upon whether or not the S&P falls through and below the technical price support sat the 2,116 to 2,120 price range. If the technical support at the middle horizontal line fails to halt the decline then another “measured move” projection using the price difference between the top horizontal line set at its August 15 and August 23 twin intraday highs at 2,193 and the middle horizontal line produces a downside price objective at approximately 2,040. The lowest horizontal line on the chart is drawn across the two short-term price lows made on April 7 and on May 19 at 2,033 and at 2,025. This technical support line would have to be held to prevent a truly seriously damaging multi-week price collapse from potentially getting up a head of steam not easily stopped. As the chart shows, a price drop below the 2,100 price level will break the currently operative intermediate-term up-trend line of rising lows made on February 11 and June 27 of this year. While this would not be a disaster it would mean that the probability of the lower horizontal line being re-tested would rise to a near-certainty. Technical indicators continue to provide a mixed picture. Both display “pennant” formations since the February price low. The MACD indicator broke below its existing up-trend line this past week and the RSI indicator ended the week testing its own up-trend line. A continuation downward by the S&P in the coming week will resolve both “pennant” formations bearishly, again increasing the odds that the S&P will continue to fall at least until re-testing the lowest of the three horizontal lines on the chart. Such a re-test now appears to be the most likely next move for the S&P 500, and that is what we should expect.

The stock price plunge on Friday was joined by a Treasury bond price plunge that raised yields along the entire bond maturity spectrum. The 2-year chart below shows the 30-year Treasury bond yield. It rose by +7 basis points on Friday to close at 2.39%. On Thursday it rose by +8 basis points to close at 2.32% in response to the European Central Bank failing to expand or extend its “quantitative easing” program of bond purchases. This 2-day upward yield move of +15 basis points shows that Mr. Rosengren’s comments by themselves did not precipitate the Friday stock market plunge. It was the combination of the ECB and Mr. Rosengren both making nearly simultaneous statements that strongly indicated that the era of central bank money-printing is coming to a close that precipitated the simultaneous price plunge of both stocks and bonds. By moving up and through the technical resistance at the top of its sideways yield range since its July 21 close at 2.30% at the top dashed horizontal line the 30-year T-bond yield executed a technical “breakout” to the upside. A “measured move” projection using the trading range between the two horizontal dashed lines projects that it will rise at least to a yield of 2.42%. This is approximately at the very steeply-sloped down-trend line of falling yield highs since December 7 of last year. The most recent contact that the 30-year T-bond yield had with this down-trend line was on May 31 of this year when it reached an intraday high yield at 2.68%. We will emphasize that this is a relatively short-term down-trend line. The longer-term and less steeply-sloped line of July 2 and November 5, 2015 yield highs is way up at approximately 2.875%. If the 30-year T-bond yield were to decisively move up and through the steeply-sloped down-trend line then the door would be opened to a really big upward move in long-term U.S. interest rates. This is really what the U.S. Federal Reserve fears and it is why they find themselves in this monetary policy box of their own construction. Rising long-term interest rates will not only be likely to put the kibosh on the revival of the home construction industry, but will also put the kibosh on the whole U.S. stock market because it will no longer be financially attractive for U.S. corporations to issue long-term debt securities and use the proceeds to buy back their own stock shares. Corporate stock buy-backs have been supporting the U.S. stock market since 2010. Take that support away and share prices will have but one direction open to them, that direction being downward.

Market-Leading Computer Technology Stock Index (XCI), Semiconductor Stock Index (SOX) Finally Turn Down During this past week the technology stock-heavy NASDAQ Composite Index made a new and higher 52-week and all-time price high on Wednesday, September 7 at 5,287. This new high was not confirmed by any other major U.S. stock index also making a new and higher price high. The fact that the NASDAQ Composite Index alone was able to push up to a new high indicated that technology-related stocks were still attracting speculative money long after stocks in other industry sectors had ceased to do so. The 5-year chart below shows the NYSE-Arca Computer Technology Stock Index (ticker $XCI). This stock index contains all of the NASDAQ heavyweight stocks including Apple (AAPL), Google/Alphabet (GOOGL), Facebook (FB), and Microsoft (MSFT). It also mad a new 52-week and all-time price high on September 7 at 1,838. The 5-year chart below shows that this price high was made at the top channel lines of both its intermediate-term up-trend channel since February 11 of this year (parallel thin blue lines on chart) and also its long-term up-trend channel in place since October 4, 2011 (parallel thick blue lines on chart). The $XCI Index has reliably turned down from the long-term channel top line no less than 5 times. Intermediate-term price highs that form this top channel line were made on November 28, 2014, February 24, 2015, April 28, 2015, November 5, 2015 and now September 7, 2016. Based upon its 5-year history we should expect that the $XCI index will now retreat at least to the horizontal line drawn from its short-term price high made on March 30 of this year at 1,724. That downward price objective is down from the Friday closing price of 1,773 by just -2.76%. What we do not know is whether or not the downward price move will stop at this short-term technical price support point. If not then a further downward move to the lower channel line of the intermediate-term up-trend since February 11 would likely follow. This up-trend line is at approximately 1,615 and down by -8.9% from the Friday closing price. We have drawn a interior dashed trend line parallel to the long-term up-trend channel lines that is even lower at approximately 1,585, but we believe that there is only an extremely low and remote chance that the $XCI Index might fall to that interior trend line. Both technical indicators confirm the up-trend in place since February 11. There is nothing on the chart that even remotely suggests that the long-term upward trend in place since October 2011 might be in danger of being broken. A downward correction is however called for by the long-term up-trend channel, and that is what we expect to see over the next 8 to 12 weeks. A suitable price entry point for long-term investment-oriented accounts is highly likely to be made available prior to the end of 2016.

Also helping the NASDAQ Composite Index reach a new high on September 7 were the stocks of companies in the semiconductor chip industry. A 5-year chart of the PHLX Semiconductor Stocks Index (ticker $SOX) is below. Both technical indicators also confirm this sector index intermediate-term up-trend that has actually been in place since August 24 of last year. We have drawn a parallel interior intermediate-term trend line across the $SOX Index short-term price highs made October 23 and December 4, 2015 and on June 8 and June 23, of this year. This dashed up-trend line is the major technical support to the downside and we should not expect that the $SOX Index might fail to at least produce a vigorous upward “bounce” should it fall to test it from above. This support line is at approximately 730 and down by -5.0% from the $SOX Friday closing price of 768.38. Note that the $SOX steeply-sloped up-trend line of rising

lows made on February 11 and June 27 will intersect the dashed interior trend line by the end of September, thus providing two sources of technical price support at approximately the same price level. We should not expect that the $SOX Index might fall below the 730 price level.

Our chart analysis of the $XCI and the $SOX indices tells us that we should not expect that the NASDAQ Composite Index is in any danger of initiating a major downward price movement at this time. That judgment can change if the technical price support levels specified by the chart analysis are violated to the downside

in a meaningful and serious manner. Until that time however the evidence shows that Friday’s big sell-off was a profit-taking exercise that might continue for a few more days but is unlikely to derail the intermediate-term upward price trends of all stock indices that have been in place since the major intermediate-term price lows were made in February of this year.

Intermediate-Term 50-day Druitt’s Oscillator Finally Turns Down---Next Week’s Market The chart below shows the Intermediate-term 50-day Druitt’s Oscillator compared to the S&P 500 index since March 2008 using weekly-close data. The Druitt’s Oscillators are composed of moving averages of daily new high/new low ratios and daily advance/decline ratios on the NYSE combined into a single figure that can range between 0 and 100. The 50-day oscillator uses 50-day moving averages for its construction. In theory the Druitt’s Oscillators should be leading indicators of future S&P and Dow price trend direction. The chart below shows that for the most part the 50-day oscillator has lived up to this billing over the past 8 years. Any time that it shows an abrupt directional change to falling from rising we should expect that an intermediate-term downward price movement by the S&P and Dow Industrials will commence within the following 3 months of time. Since its February 27, 2015 peak high the 50-day oscillator has constructed an upward-sloping trend channel of perfectly parallel lines of rising highs and lows. The February 27, 2015 high preceded the actual S&P and Dow peak price highs made on May 19-20 by almost 3 months. Its later peak high on May 13 of this year preceded the Dow and S&P price highs made on June 8 that were followed by a 3-week downward correction into the “Brexit Vote’ price lows on June 27 by approximately 4 weeks. Earlier peak highs in March and September 2012 made at levels close to its peak weekly-close high made very recently on August 26 at 96.5 preceded peak price highs made by the S&P 500 by 17 calendar days and by 2 weeks. Only once, on April 30, 2010, did a peak weekly-close high by the 50-day oscillator coincide exactly with Dow and S&P peak price highs that were immediately followed by an intermediate-term downward price correction that lasted through July 1, 2010 and lowered both indices by about -17.0%. Peak high inflection points by the 50-day oscillator do provide advance warning that a Dow and S&P price decline of significant magnitude lies not far down the road. They do not provide exact guidance on exactly what date these sustained downward moves will commence. What we can say with a great deal of confidence is that long-term investment-oriented accounts will be rewarded with significantly lower price entry points for stock investment purposes if they suspend stock purchases for now and delay them until a future date. A downward price move likely to lower the main U.S. indices by at least -7.5%, and more likely by a larger percentage, will take place prior to the end of 2016. Contemplated stock purchases should be delayed until after this correction has run its course, not made immediately in advance of its commencement.

0

500

1000

1500

2000

2500

S&P 500 vs. 50-Day Oscillator x 10

50-Day Oscillator x 10 S&P 500

Feb. 27, 2015 May 13, 2016

Sept. 7, 2012Mar. 16, 2012

Apr. 30, 2010

Our call for the coming week is that U.S. stock indices are likely to start to the downside on Monday but are not likely to fall for the entire week. In fact, Friday shapes up to be a strong rally day. We do not expect that the S&P 500 will fall much below the 2,100 price level, possibly to as low as 2,090. By the end of the week we expect that all or nearly all of the early-week price losses will have been regained and the S&P end the week very close to its current level of 2,127. Our maximum upside target is to the August 2 daily-close price at 2,150. If this price level is even reached it should not be reached prior to Friday.

Thomas J. DruittFinancial Markets Research and AnalysisStonehenge Analytics