Presented by S.S. Gosali©December 15, 2015

2015-2016 Trading Strategy

for Market Deleveragingand Correction

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Disclaimer

• We believe the risk for US equity market to continue up is greater than the downside.– Holding portfolio with long exposure to US equities, high yield credit, junk bonds, and

commodities are very risky compared to cash or short portfolio.

• If the Federal Reserve tightens the monetary policy by raising rate, it will remove liquidity from the markets.– Risky assets, such as equities, have been driven by the liquidity provided by major central

banks stimulus. – Fed is the single most powerful central bank that has been fueling the asset prices around the

world, especially US markets. Commodities and countries with commodities dependent economy would suffer from strong dollar caused by fed removing liquidity from the markets.

– Copper, crude oil, and major commodities prices have been down significantly in 2015.• Commodities price drop caused by 2 cases: strong dollar and weak world demand for the

commodities due to recession in EU and China slowdown.– Weak commodities prices affect profitability of related companies and countries, such as

Glencore (UK), Rio Tinto, Shale oil companies (OAS, WLL, etc), Australia, Canada, South Africa, and Brazil.

– The next chain of problems are the defaults of these companies and credit instruments. • This starts to show up in the Junk bond markets ( for example, US ETF: JNK) and High-yield

bonds (US ETF: HYG). These ETFs have been down trending. • Triggered first causality: Third Avenue Management’s Focused Credit Fund is losing its

value in rapid manner that it blocked clients from cashing out from the funds. Liquidity issue occurred.

– Raising rate by 0.25% is predicted to remove $400 Billions to $800 Billions of liquidity from the markets. This means reverse Quantitative Easing (QE). As a reminder, QE1 was worth $700 Billions.

Executive Summary

• Fundamentally, the economic leading indicators in the US as calculated in our proprietary tool has indicated the first sign of contraction in the US for the next 12 months. – The indicators have been pointing to a healthy economic recovery the

last few years, since late 2009, and last reading in December 1, 2015, is the first reading that contraction has indeed started. It will be confirmed in the next month reading.

– This increases the chance for market correction and GDP growth decline.

• Technically, S&P500 has been diverging from the market internals and credits. The convergence will mean a market correction as will be presented in the rest of the slides.

• Trading strategy will be presented near the end of the presentation to approach the current situation.

Executive Summary

S&P500 Daily Chart

Weekly S&P500

Market Internals(Health Indicators)

Put/Call Ratio

Percent Stocks Above 200MA

S&P500 vs Crude Oil

Biotech Bubble

Junk Bonds Divergence vs. S&P500

Advancing and Declining Issues Confirms Drop

1 Year Chart of Advance-Decline Issues

3-month Chart of NYAD

Economic Indicators

Univ. Michigan Consumer Sentiment

Real GDP Growth

ISM – Manufacturing Index

ISM – New Order Index (Leading indicator)

ISM NMI – Non-manufacturing Index (Service)

ISM – Business Activity (Leading ISM NMI)

Trading StrategyOn Select Financial

Instruments

Volatility (Traded with VIX ETF: UVXY)

Previous Characteristic of UVXY

Malaysia ETF

Brazil ETF

Nasdaq

FIT – Fitbit, an overhyped hardware company