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 UpdateWeek of October 10-14, 2016

Dow Industrials, S&P 500 Fall to Re-Test September 12-14 LowsT-Bond Yields Rise to Levels Not Seen since June

Health Care Sector Stocks Lead Downward;NYSE-Arca Pharmaceutical Stocks Index ($DRG) Breaks 5-year Up-trend Line

Druitt’s Oscillators Generate Intermediate-Term “Sell” Signal---Next Week’s Market

U.S. stocks fell across a broad front on a week-to-week basis this past week. Of the 20 industry stock sectors that “Weekly Update” tracks each week only the airline stock sector ($XAL Index) produced any appreciable weekly price gain. The “defensive” consumer staples stocks sector (XLP ETF), telecommunications stocks sector (XTC Index) and utility stocks sector (Dow Utilities Average) recorded minor weekly price gains. All other sectors that we track fell in price for the week. The consistent drumbeat from the financial news media all week was centered on speculation that the U.S. Federal Reserve will institute a monetary policy tightening move prior to the end of the year by raising its target rate for the overnight federal funds interbank lending rate by +25 basis points. This speculation has gained so much traction in investment circles that it can now be called the “conventional wisdom of Wall Street”, though some might consider that particular phrase to be an oxymoron, contending that the word “wisdom” has no place being in a sentence right next to the phrase “Wall Street”. Right now the “conventional wisdom” says that hike on the target rate will be instituted at the December 14 FOMC policy meeting. One result of this seemingly universal speculative conclusion that the cost of overnight cash will be driven upward prior to year’s end has been that both stock prices and Treasury bond prices have been falling simultaneously. This is the opposite of their more usual inverse relationship to each other. The chart below compares the S&P 500 Index (red line) with the iShares 20-year+ maturity Treasury Bond Fund ETF (ticker TLT; blue line) for the past two years. As the blue and red trend lines show up until July of this year when the TLT was trending downward in price the S&P was trending upward and vice-verse. Since early July of this year the price trend of both has been downward simultaneously. This phenomenon is most usually observed when both stock and bond speculators and investors are preoccupied with anticipation a future central bank monetary policy tightening move. That is precisely the preoccupation of both markets today. With “conventional wisdom” saying that policy tightening move will arrive on December 14 we should not be surprised if both stocks and bonds continue to trend downward in price until that date, provided of course that the Federal Reserve does not surprise everyone by tightening policy at their next FOMC policy meeting on November 2.

The 2-year chart of the S&P 500 Index below shows that index has very recently constructed a bearish “descending triangle” formation since retreating from its current 52-week price high at 2,193 (intraday) that it posted on both August 15 and August 23 of this year. The red down-trend line of falling highs since August 23 is the “hypotenuse” of the triangle and the twin price lows made on September 12 and September 14 at 2,119 and last week’s intraday low at 2,114 made on Thursday, October 13 form the “base” of that triangle. If the “base’ is decisively broken to the downside then a “measured move” projection using the price range between the August 23 and September 12-14 intraday highs and lows gives a downside price target at approximately 2,045 where the lowest horizontal blue line is drawn. A move down to this price level will also decisively shatter the currently operative short-term uptrend line of rising lows made on February 11 and June 27 of this year. The dashed black up-trend line is a “theoretical” line drawn from the February 11 low that is exactly parallel to the blue line of rising highs made on April 20 and August 15. As the chart shows, the “measured move” downside target at 2,045 will intersect this “theoretical” parallel up-trend line sometime in December. With both the RSI and MACD technical indicators confirming the “descending triangle” formation on the S&P price chart with “descending triangle” formations of their own the probability that the S&P 500 will fall to at least the 2,045 price vicinity prior to the end of 2016 is prohibitively high in the “Weekly Update” opinion. We are in fact expecting a slightly larger price decline that re-testes the June 27 “Brexit Vote” intraday price low at 1,991, a forecast that we published in this month’s edition of the Market Letter. We should not be surprised if the S&P mounts one more brief rally back up to the red down-trend line of the triangle “hypotenuse” at approximately the 2,170 price level before heading down to a decisively downside “breakout” below the triangle “base”. If such a brief rally is mounted at all, this coming week and especially the final week of the month will be the most likely timing of such a rally. We suppose that we ought to say something in connection with the upcoming U.S. presidential election on November 8, and so we will. A Clinton victory is already factored into current prices. If she wins as expected then the election results will likely produce a “sell on the news” price decline immediately after November 8. On the other hand, an unexpected Trump victory will likely be sniffed out by short-term speculative accounts that drive day-to-day price behavior a few days before November 8. Should a sell-off commence prior to November 8 that is not a reaction to an unexpected Federal Reserve policy decision taken on November 2 then such a sell-off might be predicting an unexpected upset win by Trump. Since hardly anyone is prepared for this outcome we would expect a larger and deeper price decline in the event of a Trump victory than a Clinton victory. But, we expect a price decline in either case. This is appropriate in our view because neither candidate is deserving of the president’s office. Both candidates exponentially raise the probability of financial catastrophe striking the U.S. and the globe in 2017 and 2018, regardless of which one wins election.

The 2-year chart below of the yield on the 30-year Treasury bond shows that it finished the week right at an important technical resistance level. The 30-year T-bond yield sits right at its June 23 high yield of 2.56%. It has constructed an up-trend channel of rising lows and highs since making a major intermediate-term low yield on July 8 at 2.10%. Should the 30-year T-bond yield

achieve a decisive upside “breakout” then a “measured move” projection using the yield difference between the Jun 23 high yield and July 8 low yield will give an upside target yield at approximately 3.00%. The top horizontal red line is at at this “measured move” target yield of 3.00%. The chart shows that for the 30-year T-bond yield to reach this “measured move” projected target it will have to conquer at least two technical resistances in order to fulfill that projection. The top horizontal blue line is drawn across a significant short-term yield low made on October 2, 2015 at 2.75% and across two significant short-term yield highs made on March 16 of this year at the same 2.75% level and on April 26 at 2.76%. In the “Weekly Update” opinion the 30-year T-bond yield is quite unlikely to simply drive up and through this resistance line on its first attempt. Even if it did so it would quickly encounter another technical resistance in the form of its intermediate-term down-trend line of falling yield highs made in June and November 2015 at approximately 2.82%. We are therefore skeptical that the 30-year T-bond yield will see the 3.00% level anytime very soon. But, a fairly rapid move upward to the 2.75% yield level is well within the realm of reasonable expectations. We remind our readers that bond yields move inversely to bond prices. If the 30-year T-bond yield were to rise to 2.75% then the price of the TLT ETF shown earlier compared to the S&P 500 index will fall. If the correlation between the S&P 500 price direction and the TLT ETF price direction that was shown in our first chart continues to hold up through the end of 2016 then a rise by the 30-year T-bond yield to 2.75% would be accompanied by a fall in price by the S&P 500 Index.

Health Care Sector Stocks Lead Downward;

NYSE-Arca Pharmaceutical Stocks Index ($DRG) Breaks 5-year Up-trend Line

One stock market phenomenon that has had elements of both the rising long-term bond yields and the prospect of a Clinton election victory as contributing factors has been the sustained sell-off in health care industry stocks since the first of August. The 2-year chart below shows the SPDR Select Sector Health Care Industry Stocks ETF (ticker XLV).This industry sector ETF has now actually formed a short-term down-trend channel of parallel lines of falling lows and highs since topping out on August 1 at $76.00/share. As the chart shows, by reaching an intraday low of $69.42/share this past Thursday, October 13 the XLV has formed a parallel line of successively lower lows made on September 12 and October 13 to its line of falling highs made on August 1, August 23 and September 22. To date the XLV has declined in price by -8.4% from its August 1 peak price high. The chart also shows that in the process the XLV has broken its 1-year up-trend line of rising lows made on August 24, 2015 and February 11, 2016. From a chart technical perspective there is nothing standing in the way of the XLV conducting a re-test of the technical price support at the horizontal blue line drawn across its two short-term price lows made on May 19 at $68.61/share and on June 27 at $68.09/share. Should this technical support fail to halt is decline then the door will be wide open for a further collapse to the “theoretical’ dashed red down-trend line drawn from its June 27 low such that it is parallel to the already existing down-trend channel. This “theoretical” lower channel line is currently at approximately $61.00/share. In the event of a downside “breakout” by the XLV below the horizontal blue support line then a “measured move” downward projection using the range between that line and the August 1 peak price high will call for the XLV to fall to approximately $60.00/share. With both technical indicators confirming the downward trend in progress since August 1 the probability that the support line at the May 19 and June 27 lows will at minimum be re-tested is approaching a 100% certainty. The dashed black up-trend line drawn on the chart is a “theoretical” line drawn from the XLV low made on February 11 of this year such that it parallels the existing blue up-trend line of rising highs made on December 29, 2015 and August 1, 2016. There is at least some technical reason to hop that if the support line at the May 19 and June 27 lows is broken there will be minimal additional downward price movement. This “theoretical” parallel up-trend line is at approximately $66.00/share. No matter how one slices it however, investors in this ETF and this stock sector will suffer a decline of between -10.5% to -21.0% from August 1 to whatever future date will mark the end of the current intermediate-term downward price move.

As we said, politics is playing a role in this industry sector-wide sell-off. Democrat presidential candidate Hillary Clinton has dusted off old Democrat stump speeches that lambasted mainly oil companies for “conspiring” to “artificially” inflate the prices of both crude oil and refined gasoline, raking in enormous “windfall profits” through unscrupulous and unethical pricing practices. These stump speeches usually concluded with a veiled threat by the Democrat candidate to impose either “windfall profits taxes” on the oil companies or outright price controls on refined products

mandated from Washington, D.C. Ms. Clinton has revised this traditional verbal flogging of oil companies to instead substitute the names of pharmaceutical companies and biotechnology companies and their consumer products for the names of oil companies and their gasoline and heating oil refined products. They are essentially the same verbal political demagoguery with the name “Mylan Labs” substituted for “Exxon-Mobil”. Ergo, the more that market participants perceive that Ms. Clinton will be inaugurated as president next January the less desirable it becomes to them to continue holding stock in companies that she has verbally singled out for punishment at the hands of the vast federal regulatory bureaucracy that will be at her disposal for carrying out her threats of price controls and exorbitant fines for supposed misbehavior. In sum, this might be the one U.S. stock sector that would stage a huge rally in the event of a Trump upset on November 8. Also playing a role in the sharp decline of the XLV ETF is the perception that long-term interest rates will continue to trend upward. Long-term interest rates have a direct impact on the price/earnings (P/E) multiples that investors and speculators are willing to place on the future expected per-share earnings streams of these companies. As long-term interest rates rise the P/E multiple that these investors and speculators are willing to pay to own shares of these companies falls. Our very first chart comparing the S&P 500 to the TLT Treasury Bond ETF to some degree reflects a contraction in P/E multiples across the whole stock markets, but especially the P/E multiples of high-growth companies. With Ms. Clinton threatening to also impose dictatorial control of pricing practices and punitive regulatory and legal action against the makers of a very wide-ranging list of pharmaceutical products those profit growth rates will be guaranteed to fall under a Clinton presidency. Current future per-share earnings estimates will have to be vastly reduced. Couple that with rising long-term interest rates and falling P/E/ multiples and you have a stock price collapse. Therefore the direr price projections for the XLV ETF outlined earlier are well within the realm of a reasonable expectation if Ms. Clinton wins the White House.

The XLV ETF contains stocks of companies across the very broad industry category called “Health Care”. These companies generally fall into three sub-sectors—biotechnology companies, pharmaceutical companies, and health care providers. “Weekly Update” tracks all three subsectors using either the appropriate sector ETF or stock sector index. To date only the pharmaceutical stock sector index has broken down and through a truly long-term up-trend line. The NYSE-Arca Pharmaceutical Stocks Index ($DRG) broke down and through its long-term up-trend line of rising lows made on August 9 and October 4, 2011, June 1, 2012 and February 11, 2016 this past week. Its 5-year chart below shows this long-term trend line break. As the chart shows there is nothing from a technical chart perspective to prevent the $DRG Index from falling at least to the horizontal intermediate-term technical price support drawn across its short-term price low made in April 2014 at 478.66 and its February 11 price low from this year at 473.20. An intermediate-term down-trend channel of parallel lines of falling lows and highs is already well established. The lower channel line of August 24, 2015 and February 11, 2016 lows is today at approximately 445.0. By the end of March of next year it will be below 425.00. Investors in this stock sector are already down by -18.4% from its peak high at 607.54 made on August 5, 2015. The horizontal blue technical support line is down by another -20.00 from its Friday closing price of 495.86. Should the $DRG Index continue down to that horizontal support line then its decline since August 5, 2015 will rise to -21.7%. In the event of a Hillary Clinton victory on November 8 we cannot rule out the possibility that the $DRG Index will continue its downward trend until it reaches its currently existing lower down-trend channel line at approximately 445.00 as of today. Such a downward continuation would increase the total loss since August 5, 2015 to -26.7%.

Druitt’s Oscillators Generate Intermediate-Term “Sell” Signal---Next Week’s Market

The chart below is a comparison of the S&P 500 Index with the Intermediate-term 50-day, Long-term 100-day, and Ultra-long-term 200-day Druitt’s Oscillators. These three oscillators are constructed using 50-day, 100-day, and 200-day moving averages of daily advance/decline statistics and daily new high and new low statistics from the NYSE. These moving averages are then blended together into a single figure that reflects both advance/decline price momentum and new high/new low price momentum over that particular moving average time period. Using the three Druitt’s Oscillators shown on the chart we have adopted rules based upon historical experience for generation of intermediate-term “Sell” signals. An intermediate-term “Sell” signal is generated when on a weekly-close basis the Intermediate-term 50-day oscillator (red line on chart) crosses below both the Long-term 100-day oscillator (blue line) and the Ultra-long-term 200-day oscillator (yellow line) while at least two of the three oscillators are also falling simultaneously. Using these criteria an intermediate-term “Sell” signal was generated this past week. Arrows on the chart point to all eleven “Sell” signals generated since March 2009 stock market bottom. Of the ten previous “Sell” signals generated only one generated in December 2010 was completely false. The “Sell” signal generated in December 2013 was associated with only a very short-term decline of just -2.5% by the S&P 500. The other eight “Sell” signals were associated with S&P price declines that averaged -12.5% from peak intraday price high to trough intraday price low. In all eight instances the S&P 500 recorded a minimum of four successive weekly price declines. Though the Druitt’s Oscillator intermediate-term “Sell” signal does not have a perfect track record it has been right on the money in 80% of prior historical generations. At the very minimum we can say that ignoring it has been a foolish investment and trading decision. The most recent two “Sell” signals were generated on January 8, 2016 and on May 29, 2015. Associated S&P price declines took place from December 29, 2015 through February 11, 2016 for a price decline of -13.0% and from May 20 through August 24, 2015 for a price decline of -12.5%. Using the current S&P 52-week intraday price high rom August 15 at 2,193 as the peak high then an average decline of -12.5% would produce an intraday price low at approximately the 1,920 price level. Our current expectation is that the lowest price point of the decline now forecast by the Druitt’s Oscillators intermediate-term “Sell” signal will occur between November 18 and December 16. We will refine this target date estimate as more data is received.

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As we mentioned earlier in this newsletter if the S&P 500 and Dow Industrials are to mount any short-term rally in advance of the expected sustained downward price movement the upcoming two weeks between today and Friday, October 28 will be the timing of any rally attempt. Our expectation for the coming week is that just such a rally will be initiated on Wednesday of this week, October 19. Monday and Tuesday are likely to continue in the downward direction for both main U.S. stock indices. Once initiated this rally could last for as short of a time period as just 3 trading days through next Friday, October 21 or for as long as 8 trading days through the following Friday, October 28. It is highly unlikely that it will last into early November. We do not expect that the S&P 500 will rise higher than its September 22 intraday high at 2,179 during this expected short-term rally. For the coming week we do not expect that the S&P will go below the 2,095 to 2,100

price range. But, as we have stated many times, we expect that the S&P will at the minimum re-test its June 27 intraday low at 1,991 before the intermediate-term price decline now forecast by the Druitt’s Oscillators has concluded.

Thomas J. DruittFinancial Markets Research and AnalysisStonehenge Analytics