hedging risk in a high yield bond portfolio

1

Index Trend Reversal Supplement #3:

2 Bond Portfolio YTD 2011

4 Bond Portfolio Hedging Candidates

11 Bond Portfolio Direct Exposure to Financial Sector

12 Financial Exposure Hedging Candidates

19 Sample Pattern Analysis Algorithm Technique

30 ITRS Model Trade Summaries

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Bond Portfolio YTD 2011

3

Bond Portfolio YTD 2011

Symbol Calendar Period Position Value chg. (%) Position Value chg. ($)

JNK May 31 - June 16 -5.13% -$86,250

VWEHX May 16 - June 21 -2.21% -$53,877

TPINX March 9 - 17 -2.34% -$41,761

JNK March 8 - 16 -2.44% -$37,875

TPINX May 2 - 5 -1.284% -$22,779

PTTDX January 27 – February 10 -1.1% -$20,876

>$20k Drawdowns January 1 – July 7

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Bond Portfolio Hedging Candidates

Symbol Calendar Period Position Value chg. (%)

Position Value chg. ($)

U.S. TreasuryBond Futures

CBOE Mini-Volatility Index Futures

JNK May 31 - June 16 -5.13% -$86,250 0.826% 47.120%

VWEHX May 16 - June 21 -2.21% -$53,877 1.364% 3.399%

TPINX March 9 - 17 -2.34% -$41,761 2.038% 33.047%

JNK March 8 - 16 -2.44% -$37,875 2.933% 42.304%

TPINX May 2 - 5 -1.284% -$22,779 0.639% 8.982%

PTTDX January 27 – February 10 -1.1% -$20,876 -1.43% -3.305%


http://www.cmegroup.com/trading/interest-rates/us-treasury/30-year-us-treasury-bond_contract_specifications.html




http://cfe.cboe.com/Products/Spec_VM.aspx



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Bond Portfolio Hedging CandidatesJNK: May 31 – June 16

6

Bond Portfolio Hedging CandidatesVWEHX: May 16 – June 21

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Bond Portfolio Hedging CandidatesTPINX: March 9 - 17

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Bond Portfolio Hedging CandidatesJNK: March 8 - 16

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Bond Portfolio Hedging CandidatesTPINX: May 2 - 5

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Bond Portfolio Hedging CandidatesPTTDX: January 27 – February 10

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Bond Portfolio Direct Exposure to Financial Sector

Holding Exposure Weight within holding Weight within bond portfolio

PTTDX $459,272 24% 4.8%

HABDX $336,988 23% 3.52%

VWEHX $333,651 15% 3.49%

JNK $140,778 9.3% 1.47%

Total $1,270,690 n/a 13.29%

Reported financial sector allocations in corporate bond holding prospectūs

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Financial Exposure Hedging Candidates

Symbol Calendar Period Position Value chg. (%)

Position Value chg. ($)

Russell 2000 Index Mini Futures(short)

Direxion Daily Financial Bear 3X

JNK May 31 - June 16 -5.13% -$86,250 6.648% 20.157%

VWEHX May 16 - June 21 -2.21% -$53,877 2.822% 9.577%

TPINX March 9 - 17 -2.34% -$41,761 2.85% 12.20%

JNK March 8 - 16 -2.44% -$37,875 -1.258% 12.220%

TPINX May 2 - 5 -1.284% -$22,779 .073% 5.725%

PTTDX January 27 – February 10 -1.1% -$20,876 -1.43% -3.305%


https://www.theice.com/productguide/ProductDetails.shtml?specId=86



http://www.direxionshares.com/etf/fbe_3x_shares.html



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Financial Exposure Hedging CandidatesJNK: May 31 – June 16

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Financial Exposure Hedging CandidatesVWEHX: May 16 – June 21

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Financial Exposure Hedging CandidatesTPINX: March 9 - 17

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Financial Exposure Hedging CandidatesJNK: March 8 - 16

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Financial Exposure Hedging CandidatesTPINX: May 2-5

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Financial Exposure Hedging CandidatesPTTDX: January 27 – February 10

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Sample Pattern Analysis Algorithm TechniqueHigh Yield Bond ETFs vs. Oil

Date Barrels (millions) Catalyst

Nov. 18, 1985 1.1 Test sell

Sept. 27, 1990 5 Desert Storm test

Oct. 10, 1990 4 Desert Storm

Jan 16, 1991 17.3 Desert Storm

April 12, 1996 28 Deficit Reduction

Sept 2, 2005 11 Katrina/notice

June 23, 2011 30 Libya

Condition: Federal Oil Reserve Sales

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Step 1: Determine Stochastic of the Asset

The Stochastic Fast indicator calculates the location of a current price in relation to its range over a period of bars. The default settings are to use the most recent 14 bars (input StochLength), the high and low of that period to establish a range (input PriceH and PriceL) and the close as the current price (input PriceC). This calculation is then indexed and plotted as FastK. A smoothed average of FastK, known as FastD, is also plotted. FastK and FastD plot as oscillators with values from 0 to 100. The direction of the Stochastics should confirm price movement. For example, rising Stochastics confirm rising prices.

Stochastics can also help identify turning points when there are non-confirmations or divergences. For example, a new high in price without a new high in Stochastics may indicate a false breakout. Stochastics are also used to identify overbought and oversold conditions when the Stochastics reach extreme highs or lows. Additionally, FastK crossing above the smoother FastD can be a buy signal and vice versa.

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Step 2: Back test trend reversal incidence and severity by purchasing theasset based on the Stochastic for each instance in history

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Step 3: Determine the exact rate of change in volume in response to prior price reversals in the asset. Volume itself is less important because changes in the capital markets result in varying volume levels during comparable events over time. The degree to which volume elevates from a normalized level at the time of reversal (historically) is what we are looking for here. And of course-- how does this rate of change compare to the market (beta)?

The Volume Rate of Change indicator compares the most current bar’s volume to the volume of a bar in the past (default is 14 bars ago). The difference is calculated as a percentage and plotted as a histogram, and like an oscillator, fluctuates above and below a zero line. Volume can provide insight into the strength or weakness of a price trend. This indicator plots positive values above the zero line, and negative below. A positive value suggests there is enough market support to continue to drive price activity in the direction of the current trend. A negative value suggests there is a lack of support and prices may begin to become stagnant or reverse.

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Step 3 (continued): import the data from the volume rate of change during the catalyst

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Step 3 (continued): This is the short version of the volume rate of change data. The number we are focused on is highlighted in purple and the value is 83.33 in this example

This is the long version which contains all the variables associated with our risk factor. These data provide the algo with all of the surrounding factors regarding the rate of change –measuring exactly what transpired prior to the reversal. If you right click the image below select “size and position” then reset the image size to 100% you can see that the rate of change went parabolic when the announcement was made. This is set to a one minute interval, however as you know we can look at the same data on a per trade basis if we want/need to.

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Step 4: Now we must begin to put the data in perspective. Here we interpolate the ETFs with the same reversal data from the indices we will employ to trigger buy/sell instructions for the ETF. In this scenario we would not use the S&P 500-- we would use the benchmarked Indices for each of the ETFs themselves. Unfortunately there is not enough room on this screen to show the list of Indices.

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Step 5: The key to a profitable strategy is consistent execution. The reality of index trend reversals is that every professional trader in the world is looking to cash in on them. For this reason we have to be prepared to get our orders filled amidst abnormal conditions. This part of the algorithm looks back at the spreads of all the transactions for each asset during prior reversals. It also baselines the excess spread and will send ‘feeler’ bids to sniff out other algos. In the end the algo will generate and test a pre-determined price range for what we are willing to pay (when buying) or accept (when selling) that is used both in executing our trade and in confirming trend reversal patterns when the reversal happen now and in the future whether or not we trade them.

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Step 6: Sorry I haven't explained floor trader pivots effectively. They are critical in the execution process to alert us as to what exact price levels markets are likely to turn, therefore we ‘look back’ and capture all pivots from prior reversals for all the securities we are analyzing. The algo will fire when we have a 70% or better match. This is both when buying and selling. I have our defaults set up for 3 levels in both directions. I have only seen R4 and S4 one or two times in 16 years therefore we isolate the largest probability distribution to maximize our system resources.

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Step 7: Reversals happen when momentum stops -- then starts again in the opposite direction. We call the actual reversal the “moment of truth” – somewhat as a pun, because all speculation ends at this point. Institutions are known for creating the moment of truth- through their herding behavior of buying and selling. This input for the algo captures institutional selling and buying and stores it in a database. We then cross-reference these data when we are ready to compare prior reversals against each other and also when we are ready to trade. These data are grouped with the deltas on the options and the rate of change in volatility. This data set very effectively signals momentum.

Institution Accumulation and Distribution Counts trades over the number of shares specified by the Min. Shares input or number of trades in dollars specified by the Min. Dollars input within a the last number of ticks specified by the TickLength input in an attempt to identify markets under institutional accumulation/distribution. These markets may display a greater propensity for price movement as institutional buyers and sellers remain active.

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Stochastics, Volume Rate of Change, Relative Strength to Index, Bid/Ask Volume ratio, Floor Trader

Pivots and Institutional buying/selling are 6 of our most useful indicators for running the ITRS

algorithms to identify risk and growth factors related to index trend reversals. We use a total of 33

indicators that each generate a critical factor. The table on the following page is a summary doc I used

a few years ago to explain to my trading team how we execute the NASDAQ 100 with our model trades

and the differences between them. It is the least technical document I have on ITRS. The point of the

document is that all trades are ‘rules based’ model trades-- both buys and sells.

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NASDAQ 100 Intraday Trend Reversal Trades

The Index Trend Reversal Strategy has back tested (1.1.07-1.01-08) rule sets for the following five intraday trades when used in conjunction with pivot points. Note these trades were devised and back tested based on their high reliability of profitability; all work at least 7 out of 10 times.

TRADE TITLE COMMENTS AVG POINT MOVE SET-UP RECOGNITION RATESTANDARD DEVIATION OF

PIVOT (STOP LOSS INCREMENT)

RELIABILITY RATEOF PROFITABILITY

INTRADAY TRADES

AM REVERSALWhen the market opens at R1, PP or S1 more than 90% of the time a 5-15pt reversal occurs within the first 30min of the trading session.

10 60% away from Pivot80% at Pivot 1.3 >70% away from pivot

>90% at Pivot

DAY TREND(This is technically a trend follow through not a reversal)

The most profitable intraday trade but the most difficult to anticipate. The best indicator for a day trend is a +/-90% or higher factor on the A/D issues

37 20% n/a >70%

SUPPORT/RESISTANCE A very reliable reversal trade when the market is within 4 pts of R2 or S2 24 60% 1.1 @ R1/S1

3@R2/S/2>70% at R1/S1

>90% within 4pts of R2/S2

DAILY RETRACEMENT An entry point or the logical stop limit exit point on trades placed at daily support or resistance.

12 100% 1.3 >70%

DOUBLE TOP/BOTTOM This trade works best if the bottom/top is confirmed before placing the trade. 8 50% .7 >70%

PM REVERSAL Occurs within 75 minutes of market close. 10 70% n/a >70%

WEEKLY S/R/R

WEEKLY SUPPORT/RESISTANCE

The most profitable trade is also the most difficult to precisely time. The trade usually needs to be scaled into.

40 70% n/a >70%

WEEKLY RETRACEMENTAn entry point or the logical stop limit exit point on trades placed at weekly support or resistance.

20 100% 1.8 >70%

ITRS Model Summaries

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End of supplement

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Fear Day Supplemental Information 7.3.11Q: Just to clarify your point about the trading data you have since 1972, is this for all markets: general session, futures, and options? And, do you have

intraday data, like every hour? (Or, is it possible to have a record of the actual tape, that is of every trade?) A: We have all daily trading data for stocks and indices dating back to 1972 and for futures dating back to 1963. We have intraday data (including every

minute) dating back to 1993 for stocks and indices, and for futures dating back to 1984. We have 6 months of tick-by-tick (per trade) data.

Q: How did you determine that 3% is a good cutoff to define a "fear" day?A: Mostly trial and error of data mining. We have model trades and algorithms for trend reversals of far less magnitude, however in general the bigger the

reversal, the easier it is to trade and the more worthwhile it is.

Q: Are there also “mild fear” days (like a 2% drop in the market?)A: Absolutely, our first algo written and one of the most profitable was a -1% S&P 500 system.

Q: Is the Floor trader pivot point the opening price or the moment after the opening when the market ticks back up? A: Neither. Floor trader pivots are pre-calculated support/resistance levels that do not change throughout the day. I have provided further explanation on

how these pivots relate to the AM reversal trade I referenced previously. We can use either the cash market prices of the Indices or the near contract month futures price to calculate pivot points. I use both depending on which model trade I am executing.

Q: Have you observed other securities with this (what I consider) very high Fear Day correlation? A: Absolutely, what we are calling “Fear days” are trend reversals. The foundation of our trading and investment philosophy is 100% focused on executing

profitable trades based on index trend reversals. It boils down to tax-treatment of gains, risk tolerance and complementing the balance of your portfolio as to what securities from our existing pre-researched list of vehicles I would recommend. I listed a few in this supplement to give you an idea. It would be very neat to seek and discover which indexes and sectors were most politically sensitive then load those securities and cross/compare our base algos for the broader market. Based on my observations, and trading experiences, financials have been the most volatile and easiest to exploit for quite some time now. When trading in anticipation of dislocation in the financial sector FAZ and TZA are the best ETFs and Russell Index options are the best derivatives.

Q: It seems that for JNK and TLT, the trade one does on "fear" day is over by the end of day 3. How would you suggest one best execute to take advantage of these trades?

A: It depends on a few important factors regarding your situation that I am unaware of. Are you wanting a hedged position? How do these proposed symbols compliment your other holdings on fear days? Secondarily, we should take a closer look at how consistent JNK, and TLT trade in all market cycles, not just fear days. We have several algos we can plug the signals /symbols into and stress test them against various scenarios. These 15 examples were algo outputs not inputs. To test these symbols we’d load hundreds of market scenarios then see what the outputs told us. We also would look at days the market rises significantly which is central to understand in your risk management plan. It wont be complicated or overly time consuming to do so, but we must look at the whole picture to ensure the vehicles will do what we expect them to do when the markets align with our theses.

Q: Wouldn't the column totals (of the 15 “fear” incidents) allow us to judge which symbol was the better one to utilize? A: I wasn’t 100% clear on this but I gave it a shot. Hopefully it is what you were expecting. If not I’ll be happy to get it right on second attempt.

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Supplement Contents:

3 Historical market data

11 Rationale for 3% cutoff on Index trend reversals:

16 Pivot points

19 AM reversal

23 Securities with high market correlation

24 Symbol performance comparison on algorithm sell dates

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Historical Market Data Availability

Futures Data• 6 months of tick-by-tick data• 27 years of intraday (one minute and above) data • 48 Years of daily (Open, High, Low, Close, Volume) data

Equities Data• 6 months of tick-by-tick data• 18 years of domestic intraday (one minute and above) data• 39 years of daily (Open, High, Low, Close, Volume) data• 87 years of daily (Open, High, Low, Close, Volume) data of the Dow Jones Industrial Average

Options Data• 6 months of tick-by-tick data• All intraday (one minute and above) data since each currently traded option contract's inception• 39 years of daily (Open, High, Low, Close, Volume) data

Forex Data• 6 years of intraday (one minute and above) data • 38 Years of daily data

International Data• 6 months of tick-by-tick data• 27 years of intraday (one minute and above) data on most major exchanges

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Historical Minute Bar Database

U.S. Stock Database Description Start Date NYSE Stocks 01/01/1991 NASDAQ Stocks 01/01/1991 AMEX Stocks 07/01/1998INDEX DataSymbol Description Start Date

$INDU, $DJI Dow Jones Industrial(1) 01/02/1985

$NDX.X Nasdaq 100 Index(1) 01/02/1985$YXY0 NYSE Index 01/02/1987$RUT.X; $IUX Russell 2000 Index(1) 01/02/1985$OEX; $OEX.X S&P 100 Index 01/02/1987

$MID.X S&P 400 MidCap Index 01/02/1998

$SPX.X, $INX S&P 500 Index(1) 02/01/1983

Symbol Description Start DateAD.P Australian Dollar 01/13/1987BP.P British Pound 01/01/1980CD.P Canadian Dollar 01/01/1980DM Deutsche Mark 01/01/1980EC.P Euro FX 01/04/1999JY.P Japanese Yen 01/01/1980MP1.P Mexican Peso 01/02/1996SF.P Swiss Franc 01/01/1980

EquitiesSymbol Description Start DateNQ E-mini Nasdaq 100 07/01/1999ES E-mini S&P 500 09/11/1997ER2 E-mini Russell 2000 10/25/2001ND.P Nasdaq 100 04/10/1996NK.P Nikkei 225 09/25/1990RL.P Russell 2000 02/04/1993MD.P S&P 400 MidCap 01/04/1993SP.P S&P 500 Index 04/21/1982

Interest RateSymbol Description Start DateED.P Eurodollar 12/09/1981EM.P Libor 09/25/1990TB.P T-Bills 01/04/1982

FiberSymbol Description Start DateLB.P Lumber 01/01/1980

Chicago Board of Trade EquitiesSymbol Description Start DateDJ.P Dow Jones Industrial 10/06/1997

GrainsSymbol Description Start DateC.P Corn 04/02/1982O.P Oats 04/02/1982SM.P Soybean Meal 04/02/1982BO.P Soybean Oil 04/02/1982S.P Soybeans 04/02/1982W.P Wheat 04/02/1982

Interest RateSymbol Description Start DateMB.P 10 Year Municipal Bond/Note06/11/1985TY.P 10 Year U.S. Treasury Note 01/03/1983TU.P 2 Year U.S. Treasury Note 01/02/1991US.P 30 Year U.S. Treasury Bond 04/02/1982FV.P 5 Year U.S. Treasury Note 07/01/1988

One Chicago Single Stock FuturesSymbol Description Start Date

Over 500 Symbols Single Stock Futures/Index Symbols 02/12/2003

New York Mercantile Exchange Energy (NYMEX)Symbol Description Start DateCL.P Crude Oil 01/02/1987HO.P Heating Oil 01/03/1984NG.P Natural Gas 01/04/1993HU.P Unleaded Gasoline 09/01/1987

Metals (COMEX)Symbol Description Start DateHG.P Copper 12/01/1989GC.P Gold 01/03/1984PA.P Palladium 01/02/1987SI.P Silver 12/01/1983

New York Board of Trade Food/FiberSymbol Description Start DateCC.P Cocoa 07/01/1986KC.P Coffee 01/05/1987CT.P Cotton 01/05/1987OJ.P Orange Juice 07/06/1987SB.P Sugar 07/01/1986

IndexSymbol Description Start DateYX.P NYSE Index 11/01/1983DX.P U.S. Dollar Index 07/01/1989

(1) The ITRS research methodology employed by Index Strategy Advisors, has been collecting real-time market data for 37 technical studies performed against the DOW, the S&P 500, and the Russell 2000 since June 2002.

MeatSymbol Description Start DateFC.P Feeder Cattle 01/01/1980LH.P Lean Hogs 04/01/1981LC.P Live Cattle 01/01/1980PB.P Pork Bellies 01/01/1980

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5-minute Data Example (E-mini Crude) IEA Oil Release 6.23.11

Announcement

“Full day window ”

http://www.cmegroup.com/trading/energy/crude-oil/emini-crude-oil_contract_specifications.html

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Announcement

“3 hour window”

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“30 minute window“

Announcement

39

Tick Data Example (E-mini Crude) IEA Oil Release 6.23.11

“1 minute window“

Announcement

40

Multi Asset Example (E-mini Crude vs. JNK, GLD, TLT) IEA Oil Release 6.23.11

Announcement

“Full day window ”

41

Tick Data Summary (%) Example (E-mini Crude @8:14 A.M EST)

IEA Oil Release 6.23.11

Date Time Open High Low Close

6/23/2011 8:14 -1.59 -1.59 -1.59 -1.59

6/23/2011 8:14 -1.59 -1.59 -1.59 -1.59

6/23/2011 8:14 -1.59 -1.59 -1.59 -1.59

6/23/2011 8:14 -1.617 -1.617 -1.617 -1.617

6/23/2011 8:14 -1.617 -1.617 -1.617 -1.617

6/23/2011 8:14 -1.617 -1.617 -1.617 -1.617

6/23/2011 8:14 -1.59 -1.59 -1.59 -1.59

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Rationale for 3% cutoff on Index Trend Reversals:Bigger Moves are Less Frequent…

Historical Average* 2008 20090%

10%

20%

30%

40%

50%

60%

19%

53%51%

2%

29%27%

1%

17%

12%

S&P 500 Index Daily Price Fluctuations(1948-2009)

Days of 1% Moves or More

Days of 2% Moves

Days of 3% Moves

Daily price movements measured using closing prices. * Historical average between 1948-2009

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Rationale for 3% cutoff on Index Trend Reversals:…so when they do occur volatility is maximized making monetization is easier.

Support Resistance0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

9%4%

11% 53%

40%79%

Avg. Delta Gain within 2 std dev. from Reversal Pivot(1985-2009)

Days of 1% Moves or More Days of 2% Moves Days of 3% Moves

Increase in delta when compared to pre-reversal ratio. * Historical average between 1948-2009

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60%

40%

20%

0%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Rationale for 3% cutoff on Index Trend Reversals:A two decade pattern of low volatility has been broken…

Through December 31, 2010 MSCI World returns are hedged into US dollars; trailing tree-month data. Source: MSCI

Global Equities Realized Volatility1965-2010

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90%

80%

70%

60%

50%

1971 1975 1980 1985 1990 1995 2000 2005 2010

Rationale for 3% cutoff on Index Trend Reversals:… combined with the growth of ETFs this should exacerbate correlation making most equities “De facto indexes”

Source: MSCI

Percentage of S&P 500 Stocks Moving in Same Direction

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Rationale for 3% cutoff on Index Trend Reversals:… more reasons

• We target larger reversals for both rallies and corrections. In both cases the reversal tends to lead an extended trend making the trade safer and more profitable.

• Trade winning percentage (real and simulated) is in the very upper 90% range on 3% days. It drops to 70% for reversals of lesser magnitude.

• The Larger trading range makes execution easier.• Algorithmic probability distributions for outcomes have narrower medians: It is easier to statistically predict how a majority of market participants will respond because markets (and technical indicators) are highly correlated on these days.

• While 3% days are optimal, we target reversals based on a rolling 7-10 day trend reversal strategy. The stronger the trend (in either direction) the stronger the reversal. 1% reversals are tradable but they monetize to a far lesser extent and involve greater risk.

• Anomaly paradox: People behave more consistently under greater duress whether it be fear or greed based.o e.g. when there is no smoke and a fire alarm some will head for the exit some wont, but if there is smoke with the

fire alarm most will head for the exit; if there is fire, nearly all will head for the exit.

o The same holds true with opportunity. The stronger the opportunity the less unwilling people are to ignore it. And the more popular the opportunity the more people will follow it.

o These anecdotal examples describe the behavior of investors at moments of support and resistance on major indices. Particularly on major reversals.

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Pivot Points

• Pivot points are precise daily support or resistance levels that unlike many popular technical indicators (such as moving averages) can be used in very short term scenarios to determine whether a market is overbought or oversold.

• Pivot points are calculated based on the prior trading range of the vehicle.

• For the S&P 500, Russell 2000, and NASDAQ 100 the pivot point ranges when combined with Fibonacci retracement levels are extremely accurate in predicting when a market will reverse course and to what level it will retrace.

• We use pivot points to calculate the price to buy or sell a vehicle based on our profit expectation and maximum acceptable loss.

• We utilize pivot points to execute our trades but not to plan them. We do not place a trade without knowing exactly where the market is in relation to a pivot level. The typical trade is placed based on an alert fired from the pivot macro within the algorithm.

• Pivot points are not perfect. We must use algorithms to calculate the std. deviation of variance in fib levels related to pivot points and several other technical indicators such as stochastic momentum, bid/ask ratio, advance/decline ratio, institutional accumulation / decumulation etc.

• There are several pivot point calculators (Classic, Woodie, Camarilla, Demark) for our system, Classic formulae work the best and are embedded in all of our algorithms.

• The classic formula is:R4 = R3 + RANGE (same as: PP + RANGE * 3)R3 = R2 + RANGE (same as: PP + RANGE * 2)R2 = PP + RANGER1 = (2 * PP) - LOWPP = (HIGH + LOW + CLOSE) / 3S1 = (2 * PP) - HIGHS2 = PP - RANGES3 = S2 - RANGE (same as: PP - RANGE * 2)S4 = S3 - RANGE (same as: PP - RANGE * 3)

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Pivot Points (cont.)

• There are 9 Pivot Point levels calculated each trading day: R 1 through R4, the Pivot point, and S1 through S4.

• R = Resistance or the upper range of a trend. 4 is the max upper range, 1 is the min lower range. R levels establish when a market will stop going up and reverse course (or go sideways).

• S = Support or the lower range of a trend. 1 is the max upper range, 4 is the min lower range. S levels establish when a market will stop going down and reverse course (or go sideways).

• Here is an example of how we use Pivot points based on last Friday’s Russell 2000 Mini futures September 20011 Contract close: Let’s say we are expecting a market pullback sometime this week based on the fact that the market rallied 7.5% in only six sessions, and in six consecutive sessions, is very close to its previous resistance of 850, and that 67% of ISM led rallies retrace within two sessions -- and there are several big employment reports. So we think the market could go higher-- maybe a day or two more, but we are looking for a 50% retracement to occur over two sessions and this 90pt range from the current trend could serve us an immensely lucrative 45pt move to the downside. So we’d first start with “R” because we expect the market to pullback. We’d set alerts at R1 of 842.8 plus the std. deviation the algo says is right for this scenario. That’s it. The algo would also give us a stop level. Say at 843.6-- In this way we would know our max downside was 1pt and our upside was 45pts. Once you program the algos to give you the historical references it is just that simple. We aren't predicting a fear day, but a normal pullback from an overbought market that would be larger than usual.

TFU1 30-Jun-2011

01-Jul-2011 Change Change

%Previous

Week

Open 819.0 824.5 5.5 0.7% 791.6

High 827.1 839.0 11.9 1.4% 839.0

Low 817.8 822.8 5.0 0.6% 789.2

Close 825.4 836.6 11.2 1.4% 836.6

Range 9.3 16.2 6.9 74.2% 49.8

Volume 126,249 131,863 5,614 4.4% 703,302

Daily Pivots for day following 01-Jul-2011

R4 881.4

R3 865.2

R2 849.0

R1 842.8

PP 832.8

S1 826.6

S2 816.6

S3 800.4

S4 784.2

Source: http://www.mypivots.com/dailynotes/symbol/448/-1/ice-russell-2000-mini-september-2011

http://www.mypivots.com/dailynotes/symbol/448/-1/ice-russell-2000-mini-september-2011

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Pivot Points (cont.)

• The key to making Pivot points work in trading is knowing what levels are likely to be taken out and knowing what the std. deviations are. There are thousands of institutional algos currently that push the market to these pivot levels pull their orders to suggest a reversal and then massively reverse the reverse orders. We call these situations a breach of pivot. We have a library of breaches the system cross-checks so that we can anticipate whether or not a given market scenario is prone to one.

• I have not tested the efficacy of Pivot points for stocks or other vehicles because nearly everything worth trading is correlated to one of the three indices we are extremely numerate with. For example, if I want to trade the financial sector I use the Russell 2000 mini futures pivots. If I want to trade tech I use the NASDAQ 100 cash index pivots, If I want to trade the materials sector I use the S&P 500 cash index pivots.

• We use the pre-market session range for the mini futures contracts of the Indices we have talked about to calculate pivot points when trading early intraday models, extended models generally use the cash index prices

• After stop limit orders, pivot points are the best risk management tool in executing trades, because knowing when and at what price the market is likely to turn is the foundation for knowing when to exit a position.

50

AM Reversal

• The AM reversal is a S&P 500 “Model Trade”, meaning we’ve rigorously tested its efficacy and have exhaustively reviewed thousands of possible ‘rule-exceptions’. All model trades have a 1% stop loss. All model trades have a 70% or better win trade on the simulator. All model trades have a rule set that fires an algo when to execute the trade and at what price (buying and/or selling). Here are some high-level summary points of how the AM Reversal works:

• The trade happens by 10AM EST it is signaled and executed in the first half hour or not at all.

• There are two trades opportunities within the model: 1-the reversal bet (e.g. if the market opens lower you go long at the opening pivot, and vice versa); 2) The counter-reversal bet (if you want to bet with the prevailing trend as well you enter your trend following bet at the 10AM retracement)

• If the market opens at R1 or S1 then >70% of the time a 50% retracement will occur (e.g. if the pre-market high was 10 and S1 is 1 then the market will climb back to 5 before 10AM more than 70% of the time; the opposite is true on rallies).

• The retracement is always priced to the immediate previous trend (including its former self)

• If the reversal retracement is greater than 50% wait until the previous high/low has been hit to enter position.

• If the market opens beyond R1 or S1, the next resistance/support level is R3 or S3 or the 50% fib split of R2/R3, S2/S3. No trade should be placed away from these levels.

• The AM reversal is more accurate with catalysts in the market (good or bad).

Examples using Lehman day:

51

AM Reversal: “Lehman Day” 9.15.08

Chart intentionally left blank.

52

AM Reversal: “Lehman Day” 9.15.08

Here is an example of an AM Reversal. Note the best long trade is at the capitulation from the open and note the 10AM short entry point is roughly the tradable high for the day. Had we entered at the open our stop los would have liquidated the position as the market gained 1.6% against any ‘opening shorts’ within the first half hour. With the link below you can see that the projected Pivot point of S2/S3 with a 50% fib was 1213.65 within 1.4 of the actual opening sell-off. So the trade would have been to go long at the Pivot/Fib and then go short at the 50% level which would have been 1232.5 right at 10AM.Note the actual 50% level was exceeded. By about 4 pts, but well with the std dev.http://www.mypivots.com/dailynotes/archive/123/20080912/e-mini-sp500-december-2008

http://www.mypivots.com/dailynotes/archive/123/20080912/e-mini-sp500-december-2008

53

AM Reversal: “Day after Lehman Day” 9.16.08

Here is another example of an AM Reversal. Note the 10AM entry point is roughly the tradable high for the day (like the previous trading day). Also note that the 50% retracement was crossed by a meaningful amount and a short at any point before a) 10AM and b) the previous high would have resulted in a loss. Note the 10 point breach of pivot violently pushing the market higher right at 10AM. Several big banks have massive algo programs that try to counter this AM reversal that many traders exploit. Very few disciplined traders would hold a ten point gap against their position. 10pts is nearly the average daily range for this vehicle. Following the dark pool assault at 10AM the market did what it usually does at that threshold. Our algos calculate the difference between the fib/pivot combo and the actual price level historically. There will always be institutions with capital to push beyond the exact projected levels so this calculation is a must. It is also different for different environments and our best indicator of its efficacy (besides hindsight) is the advance/decline line. If the breadth is decidedly negative/positive against the trend reversal we know there are competing algos and can wait beyond the time frame. You can probably guess what we call the late afternoon model trade. You can see a similar (double 50% retracement/reversal) move.




54

Securities with high market correlation• Based on my research and experience, the most consistently profitable way to trade any market, is with directly correlated securities that are index

linked.

• Stocks move faster and farther than indices but they lack a pre-known consensus in their pricing behavior, thus they are largely unpredictable. When the S&P 500 is rising or falling and pauses, we can look at the advancers/decliners within it and surmise based on historical data of the underlying forces (e.g. sectors and stocks) and patterns how long and how far that trend may continue. If the a/d line is split 50/50 we can simply not trade it. We can wait until there is conviction on either side. There are many other technical indicators we can use to see leading indicators regarding an index price momentum. Whereas when stocks pause there is no way to know why or what’s next-- there is only one indicator and it is lagging: price. We have to get in and hope for the best or sit out and possibly miss out. Stocks definitely follow patterns and devoted followers can learn them. But these patterns inevitably change with the companies fortunes, life-cycle, industry trends, institutional participation and many other factors that are highly labile. There is a constancy of reshuffling impactful factors and no one yet has figured out how to corral these factors. Ironically this may change as correlation and volatility continue to rise, but that is another discussion.

• I have listed several ETF securities that have outstanding (e.g. consistent) behaviors in relation to broad market pullbacks and rallies. With nearly a thousand ETFs created since we built these algos there are no doubt many others too; I am falling in love with EDC as a international market vehicle but it is too early to endorse yet, however the algos we are testing it with are showing unmatched reliability, profitability, and accuracy. For right now, and the up until the election, the ETFs listed below will get the job done: adequate liquidity, minimal spread, consistent correlation ratios, and very predictable price behaviors in relation to market movements. Most importantly the only variable you need to care about when in the position is the price of the index behind it. For the options market the Index options are fantastic. I have trained around 30 professional traders based on the index options and we have 11 models for the NASDAQ 100, Russell 2000, and S&P 500. If you want to trade options you will experience greater liquidity and save anywhere from 200-400% on the cost of the spread by trading index options vs. options on any ETF. For your political theses, I would strongly recommend we discuss the Russell 2000 Index options for you. Both as a vehicle to exploit your market expectations surrounding political events as well as a vehicle to exploit our existing trend reversal expertise. On the following page I have a concern about the inconsistency of JNK as it correlates to the S&P 500. We can discuss during our call.

Thesis ETF Vehicle Option Vehicle

Market rout led by financials FAZ, TZA Russell 2000 Index Options

Market rally led by financials FAS, TNA Russell 2000 Index Options

S&P rally UPRO S&P 500 Index Options

S&P rout SPXU S&P 500 Index Options

Tech rally TYH NASDAQ 100 Index Options

Tech rout TYP NASDAQ 100 Index Options

55

JNK Correlation to the S&P 500 during the analysis period

56

End of supplement

57

JNK GLD TLT JNK GLD TLT JNK GLD TLT JNK GLD TLT

Date Chg 1-Day Chg 3-Day Chg 5-Day Chg

11/5/2010 -0.32% 0.26% -1.72% -0.51% 1.03% 0.45% -1.29% 0.63% -1.63% -1.99% -1.97% -2.21%

8/11/2010 -0.97% -0.33% 1.34% -0.59% 1.22% -0.25% 0.23% 2.04% 3.52% 0.41% 2.45% 3.21%

6/22/2010 -0.57% 0.88% 1.19% -0.55% -0.41% 0.68% -0.21% 1.08% 0.49% -1.22% -0.15% 2.54%

5/4/2010 -1.43% -0.74% 1.80% -1.50% 0.19% 0.59% -3.38% 2.96% 2.40% -2.08% 5.04% 0.02%

1/21/2010 -1.61% -1.44% 0.46% -0.95% -0.19% -0.17% -0.23% 0.18% -0.60% -0.05% -0.78% -0.71%

10/27/2009 -0.44% -0.01% 1.37% -1.36% -1.10% 0.47% -0.99% 0.67% 0.82% -1.51% 4.53% -0.95%

10/1/2009 -3.22% -0.97% 1.05% 0.11% 0.49% -0.69% 1.42% 4.48% -1.66% 1.74% 5.87% -1.55%

9/1/2009 -1.53% 0.54% -0.56% -1.66% 2.44% 1.46% -0.17% 3.87% -0.88% 0.42% 3.39% -1.70%

8/17/2009 -2.60% -1.49% 1.48% 1.38% 0.49% -0.58% 1.99% 0.72% 1.07% 1.97% 0.80% 0.78%

6/22/2009 -1.28% -1.48% 0.97% -0.35% 0.42% 1.18% 0.12% 1.95% 2.00% 1.56% 1.66% 2.32%

5/13/2009 -2.05% 0.43% 1.09% 0.57% -0.07% 0.39% 0.39% -0.80% -1.20% 2.90% 1.27% -0.69%

1/14/2009 -4.81% -1.35% 1.65% -2.24% 0.75% 0.16% -0.96% 5.93% -1.40% 1.66% 6.00% -6.35%

11/6/2008 0.53% -0.80% 0.46% -0.31% 0.39% -0.65% -2.13% -0.24% 0.13% -3.60% -0.10% -1.64%

9/15/2008 -2.84% 2.66% 3.24% -3.34% -0.99% -0.02% -2.48% 6.76% -0.99% 0.93% 14.98% -4.14%

9/4/2008 -0.16% -0.63% 0.80% -1.04% 0.75% -0.05% 0.12% -2.42% 1.36% -1.18% -6.77% 0.68%

5/23/2008 -1.29% 0.27% 0.44% 0.00% -2.05% -0.68% 0.53% -5.17% -2.27% 0.33% -3.58% -1.60%

Symbol performance Comparison on Algorithm sell dates

Symbol Fear Day Day 1 Day three Day five

JNK DOWN14 OF 15

DOWN11 0F 15

DOWN8 OF 15

DOWN7 OF 15

GLD UP6 OF 15

UP10 of 15

UP11 OF 15

UP9 OF 15

TLT UP13 OF 15

UP8 OF 15

UP 8 OF 15

UP6 OF 15

58

Summary

Methodology:

• Back test simulated trades in 1 anomalous scenario (Lehman bankruptcy).

• Back test simulated trades in 15 algorithmically detected market sell scenarios 2008-2010.

Observations:

• JNK falls precipitously on days of extreme fear (e.g. high volatility combined with a significant market pullback).

• JNK typically recovers within two days of the initial market shock and price decline.

• GLD rises about half the time on days of extreme fear, but will rise about 2/3 of the time within a few days of the initial shock.

• TLT gains on days of extreme fear more than 85% of the time, but only remains positive after a few days half of the time.

Conclusions:

• A short bet against JNK in the immediate day or two following a major market pullback represents the strongest risk/reward opportunity within this group of symbols.

59

Symbol performance Comparison on Algorithm sell dates


JNK DOWN14 OF 15

DOWN11 0F 15

DOWN8 OF 15

DOWN7 OF 15

GLD UP6 OF 15

UP10 of 15

UP11 OF 15

UP9 OF 15

TLT UP13 OF 15

UP8 OF 15

UP 8 OF 15

UP6 OF 15

Symbol Chg 1-day Chg 3-Day Chg 5-Day Chg

JNK -1.54% -0.77% -0.44% 0.02%

GLD -0.26% 0.21% 1.41% 2.04%

TLT 0.94% 0.14% 0.07% -0.75%

60

Contents:

1 Immediate trading days following the Lehman bankruptcy

2 Algorithmically signaled market sell signals

3 Recap of sell signals

61

Prev. close Close Chg. 1-day Chg. 3-day Chg. 5-day Chg.

S&P 500 1251.7 1192.7 -4.71% 1213.60 1.75% 1206.51 1.16% 1207.09 1.21%

JNK 41.95 40.76 -2.84% 39.40 -3.34% 39.75 -2.48% 41.14 0.93%

GLD 75.55 77.56 2.66% 76.79 -0.99% 82.8 6.76% 89.18 14.98%

TLT 94.94 98.02 3.24% 98.00 -0.02% 97.05 -0.99% 93.96 -4.14%

Lehman BankruptcyMarket Summary 9.15.08

62

Net cost 1-day ( $ return)

1-day(% return)

3-day($ return)

3-day(% return)

5-day($ return)

5-day (% return)

Sell to open (-100) TLT SEP 2008 98 Call @1.125 $11,250 $1,500 13.33% $8,750 77.78% $11,250 100.0%

Buy to open 276 JNK @40.765 $11,251 ($377) -3.35% ($280) -2.49% $57 0.5%

Lehman BankruptcyTrade Summary 9.15.08

63

Contents:




64

Algorithm sell dates based on historical risk criteria

Date Description

11/5/2010 Federal Reserve $600B Treasury bond purchase

8/11/2010 Federal Reserve announces plan to buy govt. debt

6/22/2010 Fibonacci Retracement Failure; 200 day MA Breach

5/4/2010 Floor Trader 2nd Support Level Broken

1/21/2010 White house proposes Volcker Rule

10/27/2009 Low Consumer Confidence Reading

10/1/2009 ISM Contraction

9/1/2009 ISM/Housing Expansion

8/17/2009 Floor Trader 2nd Support Level Broken

6/22/2009 VIX Extreme Gap-up

5/13/2009 Retail Sales Lagging

1/14/2009 Retail Sales Lagging

11/6/2008 Retail Sales Lagging, ISM Underperformance

9/15/2008 (1) Lehman Bankruptcy Announcement

9/4/2008 Jobless Claims Surprise

5/23/2008 Existing Home Sales Lagging, Oil $135 Resistance Broken

(1) Our allocation was 100% cash on 9.15.2008. This event is included for reference only.

65


JNK DOWN14 OF 15

DOWN11 0F 15

DOWN8 OF 15

DOWN7 OF 15

GLD UP6 OF 15

UP10 of 15

UP11 OF 15

UP9 OF 15

TLT UP13 OF 15

UP8 OF 15

UP 8 OF 15

UP6 OF 15

Symbol performance on Algorithm sell dates

(1) Our allocation was 100% cash on 9.15.2008. This event is included for reference only.

66

Algorithm sell dates based on historical risk criteriaSimulated Trade Summaries(1)

Date Trade Description Net cost 1-day ($ return)

1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

11/5/2010 Sell to open (-100) TLT NOV 2010 100 Call @.43 $4,300 $0 0.00% ($300) -6.98% $2,900 67.4%

8/11/2010 Sell to open (-100) TLT AUG 2010 98 Call @1.69 $16,900 $2,250 13.31% ($7,350) -43.49% ($31,850) -188.5%

6/22/2010 Sell to open (-100) TLT JUL 2010 98 Call @1.60 $16,000 ($4,050) -25.31% ($1,350) -8.44% ($1,350) -8.4%

5/4/2010 Sell to open (-100) TLT MAY 2010 92 Call @1.885 $18,850 ($4,150) -22.02% ($21,150) -112.20% ($21,150) -112.2%

1/21/2010 Sell to open (-100) TLT FEB 2010 92 Call @1.025 $10,250 $500 4.88% $500 4.88% $3,250 31.7%

10/27/2009 Sell to open (-100) TLT NOV 2009 94 Call @1.875 $18,750 ($2,250) -12.00% ($4,250) -22.67% ($4,250) -22.7%

10/1/2009 Sell to open (-100) TLT OCT 2010 99 Call @2.60 $26,000 $4,500 17.31% $4,500 17.31% $9,750 37.5%

9/1/2009 Sell to open (-100) TLT SEP 2009 97 Call @.95 $9,500 ($6,000) -63.16% $5,250 55.26% $5,250 55.3%

8/17/2009 Sell to open (-100) TLT SEP 2009 95 Call @1.825 $18,250 $3,500 19.18% ($2,250) -12.33% $7,250 39.7%

6/22/2009 Sell to open (-100) TLT JUL 2009 92 Call @2.275 $22,750 ($500) -2.20% ($675) -2.97% ($800) -3.5%

5/13/2009 Sell to open (-100) TLT MAY 2009 97 Call @1.05 $10,500 ($1,250) -11.90% $100 0.95% $100 1.0%

1/14/2009 Sell to open (-100) TLT FEB 2009 116 Call @2.875 $28,750 ($1,500) -5.22% $8,000 27.83% $8,000 27.8%

11/6/2008 Sell to open (-100) TLT NOV 2008 95 Call @1.20 $12,000 $2,750 22.92% $2,750 22.92% $2,750 22.9%

9/15/2008 Sell to open (-100) TLT SEP 2008 98 Call @1.125 $11,250 $1,500 13.33% $8,750 77.78% $11,250 100.0%

9/4/2008 Sell to open (-100) TLT SEP 2008 95 Call @1.15 $11,500 $500 4.35% $500 4.35% ($9,750) -84.8%

5/23/2008 Sell to open (-100) TLT JUNE 2008 92 Call @2.175 $21,750 $0 0.00% $0 0.00% $6,500 29.9%

All Trades $257,300 ($4,200) -1.63% ($6,975) -2.71% ($12,150) -4.7%

(1) Simulated trades reflect end of day closing prices for current month near in-the-money contracts .

67

JNK

Date Prev. close Close Chg 1-day Chg 3-day Chg 5-day Chg

11/5/2010 41.25 41.12 -0.32% 40.91 -0.51% 40.59 -1.29% 40.3 -1.99%

8/11/2010 39.28 38.9 -0.97% 38.67 -0.59% 38.99 0.23% 39.06 0.41%

6/22/2010 38.71 38.49 -0.57% 38.28 -0.55% 38.41 -0.21% 38.02 -1.22%

5/4/2010 39.92 39.35 -1.43% 38.76 -1.50% 38.02 -3.38% 38.53 -2.08%

1/21/2010 39.63 38.99 -1.61% 38.62 -0.95% 38.9 -0.23% 38.97 -0.05%

10/27/2009 38.54 38.37 -0.44% 37.85 -1.36% 37.99 -0.99% 37.79 -1.51%

10/1/2009 38.49 37.25 -3.22% 37.29 0.11% 37.78 1.42% 37.9 1.74%

9/1/2009 36.64 36.08 -1.53% 35.48 -1.66% 36.02 -0.17% 36.23 0.42%

8/17/2009 36.55 35.6 -2.60% 36.09 1.38% 36.31 1.99% 36.3 1.97%

6/22/2009 35.03 34.58 -1.28% 34.46 -0.35% 34.62 0.12% 35.12 1.56%

5/13/2009 34.11 33.41 -2.05% 33.60 0.57% 33.54 0.39% 34.38 2.90%

1/14/2009 32.88 31.3 -4.81% 30.60 -2.24% 31 -0.96% 31.82 1.66%

11/6/2008 31.78 31.95 0.53% 31.85 -0.31% 31.27 -2.13% 30.8 -3.60%

9/15/2008 41.95 40.76 -2.84% 39.40 -3.34% 39.75 -2.48% 41.14 0.93%

9/4/2008 42.52 42.45 -0.16% 42.01 -1.04% 42.5 0.12% 41.95 -1.18%

5/23/2008 45.89 45.3 -1.29% 45.30 -0.00% 45.54 0.53% 45.45 0.33%

Algorithm sell dates based on historical risk criteriaEquity Performance Summaries(1)

(1) Equity performance summaries reflect end of day closing prices.

68

GLD

Date Prev. close Close Chg. 1-day Chg. 3-day Chg. 5-day Chg.

11/5/2010 136.03 136.38 0.26% 137.78 1.03% 137.24 0.63% 133.69 -1.97%

8/11/2010 117.73 117.34 -0.33% 118.77 1.22% 119.73 2.04% 120.22 2.45%

6/22/2010 120.39 121.45 0.88% 120.95 -0.41% 122.76 1.08% 121.27 -0.15%

5/4/2010 115.73 114.87 -0.74% 115.09 0.19% 118.27 2.96% 120.66 5.04%

1/21/2010 108.94 107.37 -1.44% 107.17 -0.19% 107.56 0.18% 106.53 -0.78%

10/27/2009 101.86 101.85 -0.01% 100.73 -1.10% 102.53 0.67% 106.46 4.53%

10/1/2009 98.85 97.89 -0.97% 98.37 0.49% 102.28 4.48% 103.64 5.87%

9/1/2009 93.40 93.90 0.54% 96.19 2.44% 97.53 3.87% 97.08 3.39%

8/17/2009 93.00 91.61 -1.49% 92.06 0.49% 92.27 0.72% 92.34 0.80%

6/22/2009 91.90 90.54 -1.48% 90.92 0.42% 92.31 1.95% 92.04 1.66%

5/13/2009 90.70 91.09 0.43% 91.03 -0.07% 90.36 -0.80% 92.25 1.27%

1/14/2009 80.88 79.79 -1.35% 80.39 0.75% 84.52 5.93% 84.58 6.00%

11/6/2008 72.80 72.22 -0.80% 72.5 0.39% 72.05 -0.24% 72.15 -0.10%

9/15/2008 75.55 77.56 2.66% 76.79 -0.99% 82.8 6.76% 89.18 14.98%

9/4/2008 78.89 78.39 -0.63% 78.98 0.75% 76.49 -2.42% 73.08 -6.77%

5/23/2008 90.98 91.23 0.27% 89.36 -2.05% 86.51 -5.17% 87.96 -3.58%



69



TLT

Prev. close Close Chg. 1-day Chg. 3-day Chg. 5-day Chg.

99.69 97.98 -1.72% 98.42 0.45% 96.38 -1.63% 95.81 -2.21%

99.94 101.28 1.34% 101.03 -0.25% 104.85 3.52% 104.53 3.21%

97.41 98.57 1.19% 99.24 0.68% 99.05 0.49% 101.07 2.54%

91.69 93.34 1.80% 93.89 0.59% 95.58 2.40% 93.36 0.02%

91.74 92.16 0.46% 92 -0.17% 91.61 -0.60% 91.51 -0.71%

93.72 95 1.37% 95.45 0.47% 95.78 0.82% 94.1 -0.95%

98.66 99.7 1.05% 99.01 -0.69% 98.04 -1.66% 98.15 -1.55%

96.6 96.06 -0.56% 97.46 1.46% 95.21 -0.88% 94.43 -1.70%

93.35 94.73 1.48% 94.18 -0.58% 95.74 1.07% 95.47 0.78%

91.69 92.58 0.97% 93.67 1.18% 94.43 2.00% 94.73 2.32%

96.64 97.69 1.09% 98.07 0.39% 96.52 -1.20% 97.02 -0.69%

114.02 115.9 1.65% 116.09 0.16% 114.28 -1.40% 108.54 -6.35%

94.45 94.88 0.46% 94.26 -0.65% 95 0.13% 93.32 -1.64%

94.94 98.02 3.24% 98.00 -0.02% 97.05 -0.99% 93.96 -4.14%

94.77 95.53 0.80% 95.48 -0.05% 96.83 1.36% 96.18 0.68%

91.37 91.77 0.44% 91.15 -0.68% 89.69 -2.27% 90.30 -1.60%

70

Contents:




71

11/5/2010Federal Reserve $600B Treasury bond purchase.

Date SituationDescription

TrendDates

AlgorithmAlert Type

S&P 500 Performance Summary

11/5/2010 Federal Reserve $600B Treasury bond purchase

11/5/10-11/30/10

Catalyst Sell;Technical Sell

-4.7% The Federal Reserve announcement of its plans to buy $600 billion in Treasury bonds triggers several sell indicators; including a 3.6% 3 session rally - exceeding our over bought indicator at 1220 , a 9 month low on the dollar, and a record high for gold prices.

Symbol Prev. close Close Chg 1-day Chg 3-day Chg 5-day Chg

JNK 41.25 41.12 -0.32% 40.91 -0.51% 40.59 -1.29% 40.3 -1.99%

GLD 136.03 136.38 0.26% 137.78 1.03% 137.24 0.63% 133.69 -1.97%

TLT 99.69 97.98 -1.72% 98.42 0.45% 96.38 -1.63% 95.81 -2.21%

72

11/5/2010Federal Reserve $600B Treasury bond purchase.

Trade Summary Net cost 1-day ($ return)

1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT NOV 2010 100 Call @.43 $4,300 $0 0.00% ($300) -6.98% $2,900 67.4%

Buy to open 105 JNK @41.12 $4,318 $0 0.00% ($22) -0.51% ($56) -1.3%

73

8/11/2010Federal Reserve announces plan to buy govt. debt


TrendDates

AlgorithmAlert Type


8/11/2010 Federal Reserve announces plan to buy govt. debt

8/11/10-9/1/10

Catalyst Sell; Technical Sell

-7.3% The Fed's concern about growth triggers massive selling and purchasing of put options across all equity sectors --pushing the dollar to a 15 year low against the yen. Consolidation and failure to achieve and cross the 1130 resistance level on the S&P 500 promotes the first aggressive selling in August a month notorious for institutional program selling.


JNK 39.28 38.9 -0.97% 38.67 -0.59% 38.99 0.23% 39.06 0.41%

GLD 117.73 117.34 -0.33% 118.77 1.22% 119.73 2.04% 120.22 2.45%

TLT 99.94 101.28 1.34% 101.03 -0.25% 104.85 3.52% 104.53 3.21%

74


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT AUG 2010 98 Call @1.69 $16,900 $2,250 13.31% ($7,350) -43.49% ($31,850) -188.5%

Buy to open 434 JNK @38.9 $16,883 ($91) -0.54% ($35) -0.21% ($35) -0.2%

8/11/2010Federal Reserve announces plan to buy govt. debt

75

6/22/10Fibonacci Retracement Failure; 200 day MA Breach


TrendDates

AlgorithmAlert Type


6/22/10 Fibonacci Retracement Failure; 200 day MA Breach

6/21/10-7/1/10

Technical Sell -11.9% The new 52 week high set on 4/26/10 and the subsequent (twice set) 2010 low at 1040 created an extremely important Fib 50% retracement level at 1130.58. On 6/21/10 extremely frenetic trading (likely HFT algorithms) pushed the index to one standard deviation beyond the key level (1131.23); and violent selling ensued after the trade crossed. The 6/22/10 session marked both a key cross below the 200day Moving Average as well as a second consecutive close below the critical Fib level.


JNK 38.71 38.49 -0.57% 38.28 -0.55% 38.41 -0.21% 38.02 -1.22%

GLD 120.39 121.45 0.88% 120.95 -0.41% 122.76 1.08% 121.27 -0.15%

TLT 97.41 98.57 1.19% 99.24 0.68% 99.05 0.49% 101.07 2.54%

76


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT MAY 2010 92 Call @1.885 $18,850 ($4,150) -22.02% ($21,150) -112.20% ($21,150) -112.2%

Buy to open 478 JNK @39.38 $18,824 ($296) -1.57% ($650) -3.45% ($650) -3.5%

6/22/10Fibonacci Retracement Failure; 200 day MA Breach

77

5/4/10Floor Trader 2nd Support Level Broken


TrendDates

AlgorithmAlert Type

S&P 500 Performance

5/4/2010 Floor Trader 2nd Support Level Broken 4/26/10-6/8/10 Technical Sell -17%


JNK 39.92 39.35 -1.43% 38.76 -1.50% 38.02 -3.38% 38.53 -2.08%

GLD 115.73 114.87 -0.74% 115.09 0.19% 118.27 2.96% 120.66 5.04%

TLT 91.69 93.34 1.80% 93.89 0.59% 95.58 2.40% 93.36 0.02%

Summary

Two major support levels were broken on the major indices (prior to the 5/6/10 flash crash). The first, a major technical support level of 1181 on the S&P 500 was tested following the 4/27/10 sell off in response to the downgrade of Greek debt to junk status. While significant that event did not push the index below the 52 week high set on 4/1/10 of 1178.10. On 5/4/10 this level was violently crossed in the first hour of trading after breaking through the second major support level -- the floor trader secondary support level of 1176.5, an extreme level that became a resistance point for the rest of the session (with three subsequent failed attempts to cross prior to the close). While the selling on this day automatically triggered a sell in response to the short term view, there was also a long term trend line factored into this sell decision: 1181 was a pivotal support level during a critical phase of the financial crisis -- on 9/29/08 institutions largely turned off buying orders and markets plunged in response to the congressional rejection of the initially proposed wall street rescue package. This key level broken then resulted in the largest two day decline in 20 years -- what many believe was the 'shock and awe' factor leading to the eventual bailouts. 1181 was also the key support level broken leading up to the dot.com crash and pre 9/11 market correction. Failure to close above this level triggered institutional selling leading to a 25% market correction between 8/27/01-9/21/01, and a 48% correction between 3/19/02-10/10/02. 1181 was not reached and held again until 10/28/05. With only two more events at this key level with the aforementioned 9/29/08 event and the cross on this day 5/4/10.

78


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT JUL 2010 98 Call @1.60 $16,000 ($4,050) -25.31% ($1,350) -8.44% ($1,350) -8.4%

Buy to open 415 JNK @38.49 $15,973 ($8) -0.05% ($274) -1.71% ($203) -1.3%


79

1/21/10White house proposes Volcker Rule


TrendDates

AlgorithmAlert Type


1/21/10 White house proposes Volcker Rule

1/21/10-2/5/10

Catalyst Sell, Technical Sell

-10% The "Volcker Rule“, a proposed plan to curb proprietary trading within banks provokes violent selling in the largest financial institutions leading to a break of support at key 1131.85 level. S&P drops 2.46% following the announcement; the Dow 2.3%


JNK 39.63 38.99 -1.61% 38.62 -0.95% 38.9 -0.23% 38.97 -0.05%

GLD 108.94 107.37 -1.44% 107.17 -0.19% 107.56 0.18% 106.53 -0.78%

TLT 91.74 92.16 0.46% 92 -0.17% 91.61 -0.60% 91.51 -0.71%

80


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT FEB 2010 92 Call @1.025 $10,250 $500 4.88% $500 4.88% $3,250 31.7%

Buy to open 263 JNK @38.99 $10,254 ($97) -0.95% ($97) -0.95% ($24) -0.2%

1/21/10White house proposes Volcker Rule

81

10/27/2009Low Consumer Confidence Reading


TrendDates

AlgorithmAlert Type


10/27/09 Low Consumer Confidence Reading

10/21/09-11/02/09

Catalyst Sell -6.9% The consumer confidence index fell to 47.7 vs. leading economists prediction of 53.5. This was a significant disappointment and followed a second consecutive Dow close below the psychologically important 10,000 level. The prior trend Fibonacci midpoint retracement level of 1060.65 was breached during today's session triggering a short-term sell.


JNK 38.54 38.37 -0.44% 37.85 -1.36% 37.99 -0.99% 37.79 -1.51%

GLD 101.86 101.85 -0.01% 100.73 -1.10% 102.53 0.67% 106.46 4.53%

TLT 93.72 95 1.37% 95.45 0.47% 95.78 0.82% 94.1 -0.95%

82


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT NOV 2009 94 Call @1.875 $18,750 ($2,250) -12.00% ($4,250) -22.67% ($4,250) -22.7%

Buy to open 488 JNK @38.37 $18,725 ($254) -1.36% ($185) -0.99% ($185) -1.0%

10/27/2009Low Consumer Confidence Reading

83

10/1/2009ISM Contraction


TrendDates

AlgorithmAlert Type


10/1/09 ISM Contraction 9/23/09-10/2/09

Catalyst Sell -5.9% The ISM index fell to 46.1 for the Chicago region. Following a quarter that witnessed the largest gain in 11 years institutional selling pressured stocks lower 2.4% triggering a (near 52 high) protective trailing stop sell.


JNK 38.49 37.25 -3.22% 37.29 0.11% 37.78 1.42% 37.9 1.74%

GLD 98.85 97.89 -0.97% 98.37 0.49% 102.28 4.48% 103.64 5.87%

TLT 98.66 99.7 1.05% 99.01 -0.69% 98.04 -1.66% 98.15 -1.55%

84


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT OCT 2010 99 Call @2.60 $26,000 $4,500 17.31% $4,500 17.31% $9,750 37.5%

Buy to open 698 JNK @37.25 $26,001 $28 0.11% $28 0.11% $370 1.4%

10/1/2009ISM Contraction

85

9/1/2009ISM/Housing Expansion


TrendDates

AlgorithmAlert Type


9/1/09 ISM/Housing Expansion

8/28/09-9/2/09

Behavioral Sell -4.7% An 11.3% spike in the VIX following the announcement of a positive ISM report (52.9% vs. 50.5% expectation) triggered a major sell off and an automatic sell.


JNK 36.64 36.08 -1.53% 35.48 -1.66% 36.02 -0.17% 36.23 0.42%

GLD 93.40 93.90 0.54% 96.19 2.44% 97.53 3.87% 97.08 3.39%

TLT 96.6 96.06 -0.56% 97.46 1.46% 95.21 -0.88% 94.43 -1.70%

86


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT SEP 2009 97 Call @.95 $9,500 ($6,000) -63.16% $5,250 55.26% $5,250 55.3%

Buy to open 263 JNK @36.08 $9,489 ($158) -1.66% ($16) -0.17% ($16) -0.2%

9/1/2009ISM/Housing Expansion

87



TrendDates

AlgorithmAlert Type


8/17/09 Floor Trader 2nd Support Level Broken 8/7/09-8/18/09 Technical Sell -3.8% The key 992.40 support level is broken on the S&P September futures

contract, triggering an automatic sell.


JNK 36.55 35.6 -2.60% 36.09 1.38% 36.31 1.99% 36.3 1.97%

GLD 93.00 91.61 -1.49% 92.06 0.49% 92.27 0.72% 92.34 0.80%

TLT 93.35 94.73 1.48% 94.18 -0.58% 95.74 1.07% 95.47 0.78%

88


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT SEP 2009 95 Call @1.825 $18,250 $3,500 19.18% ($2,250) -12.33% $7,250 39.7%

Buy to open 512 JNK @35.6 $18,227 $251 1.38% $363 1.99% $450 2.5%


89

6/22/2009VIX Extreme Gap-up


TrendDates

AlgorithmAlert Type


6/22/09 VIX Extreme Gap-up

6/11/09-7/8/09

Behavioral Sell -9.9% Following a World bank Global economy report that made a downward revision of 2009 contraction from 1.7% to , the VIX opened with a 8% gap. Triggering automatic sell orders across commodities, and the energy sector. The S&P broke all floor trader pivot support points including two levels in the first half hour, Ultimately closing at the low for the day.


JNK 35.03 34.58 -1.28% 34.46 -0.35% 34.62 0.12% 35.12 1.56%

GLD 91.90 90.54 -1.48% 90.92 0.42% 92.31 1.95% 92.04 1.66%

TLT 91.69 92.58 0.97% 93.67 1.18% 94.43 2.00% 94.73 2.32%

90


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT JUL 2009 92 Call @2.275 $22,750 ($500) -2.20% ($675) -2.97% ($800) -3.5%

Buy to open 657 JNK @34.58 $22,719 ($79) -0.35% $26 0.12% $171 0.8%

6/22/2009VIX Extreme Gap-up

91

5/13/2009Retail Sales Lagging


TrendDates

AlgorithmAlert Type


5/13/09 Retail Sales Lagging 5/8/09-6/1/09

Catalyst Sell -5.5% Retail sales in April were reported at a decline of 0.4% vs. the expected 0.1%. The news triggered a sell off across all sectors and resulted in the breach of the S&P 500 Fib 50% retracement level of 907.09.


JNK 34.11 33.41 -2.05% 33.60 0.57% 33.54 0.39% 34.38 2.90%

GLD 90.70 91.09 0.43% 91.03 -0.07% 90.36 -0.80% 92.25 1.27%

TLT 96.64 97.69 1.09% 98.07 0.39% 96.52 -1.20% 97.02 -0.69%

92


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT MAY 2009 97 Call @1.05 $10,500 ($1,250) -11.90% $100 0.95% $100 1.0%

Buy to open 314 JNK @33.408 $10,490 $60 0.57% ($144) -1.37% $41 0.4%


93



TrendDates

AlgorithmAlert Type


1/14/09 Retail Sales Lagging1/6/09-3/6-09 Catalyst Sell -29%

Retail Sales in December declined 2.7% versus an expectation of 1.2% Leading to a broad based sell off -- including a drop below the key 851.53 S&P support level within the first half hour of trading.


JNK 32.88 31.3 -4.81% 30.60 -2.24% 31 -0.96% 31.82 1.66%

GLD 80.88 79.79 -1.35% 80.39 0.75% 84.52 5.93% 84.58 6.00%

TLT 114.02 115.9 1.65% 116.09 0.16% 114.28 -1.40% 108.54 -6.35%

94


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT FEB 2009 116 Call @2.875 $28,750 ($1,500) -5.22% $8,000 27.83% $8,000 27.8%

Buy to open 918 JNK @31.30 $28,733 $83 0.29% ($367) -1.28% $294 1.0%


95

11/6/2008Retail Sales Lagging, ISM Underperformance


TrendDates

AlgorithmAlert Type


11/6/08 Retail Sales Lagging, ISM Underperformance

11/5/09-11/21/08


-35% Retail Sales posted the worst October sales results in 35 years and an unprecedented 9.5% decline from the prior reporting year. October same-store sales, or sales at stores open at least a year, fell 0.7% and were much worse than an initial forecast of a 0.3% drop. The November ISM non manufacturing reading was 37.6 (the lowest level recorded at any point during the financial crisis).


JNK 31.78 31.95 0.53% 31.85 -0.31% 31.27 -2.13% 30.8 -3.60%

GLD 72.80 72.22 -0.80% 72.5 0.39% 72.05 -0.24% 72.15 -0.10%

TLT 94.45 94.88 0.46% 94.26 -0.65% 95 0.13% 93.32 -1.64%

96


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT NOV 2008 95 Call @1.20 $12,000 $2,750 22.92% $2,750 22.92% $2,750 22.9%

Buy to open 375 JNK @31.95 $11,981 ($38) -0.31% ($38) -0.31% ($41) -0.3%

11/6/2008Retail Sales Lagging, ISM Underperformance

97

9/4/2008Jobless Claims Surprise


TrendDates

AlgorithmAlert Type


9/4/08 Jobless Claims Surprise 8/11/08-9/18/08


-15.8% Following an unexpected jump in the number of people filing for jobless benefits and a report by ADP Employer Services showing U.S. private employers slashed 33,000 jobs in August, all 3 Key Indices traded below key S1, S2, and S3 floor trader pivot levels.


JNK 42.52 42.45 -0.16% 42.01 -1.04% 42.5 0.12% 41.95 -1.18%

GLD 78.89 78.39 -0.63% 78.98 0.75% 76.49 -2.42% 73.08 -6.77%

TLT 94.77 95.53 0.80% 95.48 -0.05% 96.83 1.36% 96.18 0.68%

98


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT SEP 2008 95 Call @1.15 $11,500 $500 4.35% $500 4.35% ($9,750) -84.8%

Buy to open 271 JNK @42.45 $11,504 ($119) -1.04% $41 0.35% $16 0.1%

9/4/2008Jobless Claims Surprise

99

5/23/2008Existing Home Sales Lagging, Oil Resistance Broken


TrendDates

AlgorithmAlert Type


5/23/08 Existing Home Sales Lagging, Oil $135 Resistance Broken

5/19/08-7/15/08


-19.90% S1 Broken on S&P 500; 5% Rise in Oil crossing previous resistance.


JNK 45.89 45.3 -1.29% 45.30 0.00% 45.54 0.53% 45.45 0.33%

GLD 90.98 91.23 0.27% 89.36 -2.05% 86.51 -5.17% 87.96 -3.58%

TLT 91.37 91.77 0.44% 91.15 -0.68% 89.69 -2.27% 90.30 -1.60%

100


1-day (% return)

3-day ($ return)

3-day (% return)

5-day ($ return)

5-day (% return)

Sell to open (-100) TLT JUNE 2008 92 Call @2.175 $21,750 $0 0.00% $0 0.00% $6,500 29.9%

Buy to open 480 JNK @45.3 $21,744 ($38) -0.18% $278 1.28% $72 0.3%

5/23/2008Existing Home Sales Lagging, Oil Resistance Broken

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