Newsletter 03202016 Final Volume 2 Issue 2

Copyright © 2016 EQS Capital Management LLC, See important disclosure on last page

All rights reserved. 1 www.eqstrading.com

SIGNALS

Last month we gave 6 reasons as to why the

US economy is heading into recession. A lot

can happen in a month and just like that, the

commodity and equity markets have rallied

and “Everything is AWESOME!!!” (For those

of you who have small children, the theme

song from “The Lego Movie” should be stuck

in your heads right about now).

This last month has brought strong rallies and

an auspicious start; “bull” news is slowly over-

taking “bear” news in the media as many pun-

dits have emerged to declare the bottom in oil

and equities is behind us, and predict prosper-

ous times ahead. Before we debunk a 2016 recession

and do an election year “flip-flop,” we need to look at

what, why, and how this rally started, and if everything

really is awesome, or if the rally deserves a sarcastic

“Yeah, right!”

Before we can look ahead, we must look back. What is

it that started the bear market doom and gloom predic-

tion that could

cause the economy

to succumb to a

recession in 2016?

Firstly, the business

cycle is coming to a

close across the

globe as the eco-

nomic engine of

growth is slowing

down. Commodity

demand is soft, and

prices have been in

free fall. Corporate

profits are weak and

industrial production

is contracting across the world and in America. Seem-

ing most important to the American economic outlook is

a paucity of jobs, despite research conveying that

America is nearing “full” employment. (continued on

Page 2)

E V E RY T H I N G I S AW E S O M E ! ! ! . . . (R I G H T ? )

I N S I D E T H I S I S S U E :

Awesome Continued 2

Precious Metals 4

Crude Oil 5

Natural Gas 7

About EQS 8

Terms and Disclosures 9

E Q S T R A D E R E C O M M E N D A T I O N S

T H E S OU RC E

F O R C O MMOD ITY

T RA DING S IG NA LS

Volume 2, Issue 2 March 20, 2016

A Weekly Publication on the Commodity Markets

©

Commodity SymbolCurrent

PositionEntry Date Stoploss

Current Position

ReturnMTD Return YTD Return

Average 10-Year

Annual Return

Sharpe

Ratio

WTI Crude Oil CLK16 Long 2/23/2016 2.50% 10.93% 16.35% 9.97% 43.54% 1.69

Brent Crude Oil EBK16 Long 2/18/2016 2.50% 7.88% 12.07% 3.44% 50.48% 1.15

Diesel HOJ16 Long 2/19/2016 2.50% 10.89% 11.25% 11.92% 35.98% 1.51

Gasoline RBJ16 Long 2/23/2016 2.50% 9.84% 2.50% 15.58% 53.74% 1.22

Natural Gas NGJ16 Short 12/27/2015 3.00% 54.81% -17.21% 15.32% 71.44% 1.54

Gold GCJ16 Long 3/21/2016 1.00% 0.00% -4.29% 10.84% 31.96% 2.33

Silver SIH16 Short 3/8/2016 1.75% -3.59% 1.27% 14.55% 67.35% 1.26

This performance is simulated using corresponding stop loss recommendations. No leverage used on these results.

Refer to important disclosures on the EQS Trading (www.eqstrading.com) website.



The question then becomes - what has changed? A slew of positive economic indicators surfaced for starters.

GDP was revised upward to 1.0%, exceeding the consensus at 0.4%, the ISM manufacturing indices both came

in above consensus at 49.5 and 53.4, respectively, and the employment indicator, nonfarm payrolls, exceeded

the consensus at 242k vs 190k. This brought on the bulls and commodity prices have had massive rebounds in

a short amount of time. It is not just oil that has been making big gains, but several others, including metals and

agriculture. For example, look at the iron ore chart. In the last 60 days, iron has moved from about $34 to $59,

before falling back to $50 in the blink of an eye. The move in the “sleepy” iron ore market is not a “normal” bull

market rally.

As the old paradoxical riddle goes-what comes first, the chicken or the egg? Industrial metals rally, then energy rallies, and then the equity markets follows with oscillating swings. Rumors and stimulus seem to imbue the most influence on large swings in how traders and hedgers are preparing for the future. We constantly preach that fear and uncertainty drives markets. Despite commodity jumps, there are continued fears in Asia as China and Japan continue to produce weak economic data, only to be followed by moves of stimulus, or moves due to the lack of stimulus. Speaking of fear and uncertainty, recent swings in precious metals bring a unique view to recent volatility in glob-

al markets. There are many factors that swing the gold and precious metal market as currencies rise and fall, and Central Banks enter and exit stimulus plans, and monetary and fiscal policy drive lending rates, but this following chart seems to defy logic, and is worth a second look.

The Gold "coverage ratio" that shows the total number of gold claims relative to the physical gold that "backs" potential delivery requests hit a record of 542 ounces earlier in the year in potential paper claims to every ounce of physical gold. The physical to paper gold story should not in and of itself cause alarm and in no way does it tell the story of the recession, or a bottom or top of any market, but it expounds on the story that fear and uncer-tainty are continuing to drive current market conditions. The boom and bust of business cycles often overshoot and undershoot expectations. As we have previously reported, the commodity cycle is often a foreshadowing tool of predicting the future tide path of economic health. We are only a quarter of the way through this New Year, and for some, the tide has brought in fears of reces-sion, and to some the tide has already washed away those fears. Uncertainty remains, as Japan and China look to stimulate growth, emerging markets look to reverse hard times, oil producing countries yearn for higher energy prices, and Europe is faced with the possibility of a “Brexit.” Recession has not reached America yet, but before you pop “The Lego Movie” in the DVD player and sing along to the theme song “Everything is AWSOME!!,” know that the world economy has not magically been ameliorated overnight. In the world of economics, tides come and go rapidly, lifeguards can save your life, but at the end of the day no one can control the force of the undertow that is waiting to sweep swimmers out to sea.

EVER T HI N G I S AW E SO ME ! ! ( C O NTI N U E D )

GDP was revised upward to 1.0%, the ISM indices both came in

above consensus 49.5 and 53.4,

respectively, and nonfarm payrolls,

exceeded the consensus at 242k

vs 190k.



The gold bugs are biting and prices are off to an impressive start this year. In fact, the gold

rally so far in 2016, represents the second best start to a year since the 1970’s. Gold has

gained 18.5%, making it the 2016 best-performing investment. The metal touched a one-year

high of $1,287.80 on March 11.

The Fed’s dovish stance to not raise interest rates has once again fueled the gold rally and

consequently, EQS has initiat-

ed another “long” recommen-

dation on gold. The Fed on

Wednesday cut its estimates

for raising interest rates this

year and offered a cautious

outlook on the global economy.

Gold was also buoyed by a

weaker dollar, which fell to its

lowest level since October after

the Fed’s decision. Gold, which is denominated in the U.S. currency, becomes more afforda-

ble to foreign buyers when the dollar declines.

A lower interest rate outlook, a weaker dollar, and concerns of global economic weakness

have many analysts, including JP Morgan and Doubleline Capital, forecasting gold prices

moving higher between $1300 and $1350 per troy ounce. Underpinning this view of the safe

haven trade were fears of China and/or the US heading into a recession. This was com-

pounded by the prospect of negative interest rates becoming more widespread given the

economic woes across the globe.

However, there some analysts taking the other side of the view. Specifically, Goldman

Sachs and Societe Generale-have been sali-

ently outspoken that the recent gold rally is

unsustainable. Improving economic condi-

tions in the US has removed the momentum

of safe haven buying. Additionally, the con-

sensus among analysts are that the Fed will

hike rates one to two more times this year

and several more during 2017. If this plays

out, the US dollar will rise in value and this is

bearish for gold.

The chart pattern reveals that gold prices

broke out of its pennant formation into a de-

scending channel. A break above or below

this channel will indicate gold’s next move.

EQS believes gold is positioned to shine and

will breakout to the upside, clearing $1300

per troy ounce.

GO L D P R I C E S - -P O I S E D TO SH I N E

Since the beginning of the

year, gold has gained 18.5%,

making it the 2016 best-performing

investment.

Bullish

Bullish Factors Dominate

Pennant

Descending Channel

Gold Prices



Its amazing how market sentiment can change in just one month. In our previous issue of

Signals, EQS stated there was greater than 50% chance that crude oil could dip below $20/

bbl as the risks of recession in the US were rising and global supplies remained robust. On

February 23rd, the EQS model flipped its positioning from “short” to “long” and so far, our

subscribers have been rewarded handsomely. Crude appears to be breaking out to the up-

side, trading periodically above the psychological $40/bbl barrier and many analysts are

speculating that oil has bottomed.

There are a few reasons for the shift to a bullish stance. Firstly, and most important, is that

monthly oil production is finally showing a year-on-year contraction. Secondly, as mentioned

in the cover story, recent economic indicators for the US have shown notable improvement.

Q4 GDP was revised upward to 1.0%, exceeding the consensus at 0.4%, the ISM manufac-

turing indices both came in above consensus at 49.5 and 53.4, respectively, and the employ-

ment indicator, nonfarm payrolls, exceeded the consensus at 242k vs 190k. Indeed, this

collection of positive data points translates into an improved demand outlook for oil. Conse-

quently, market sentiment swiftly changed with managed money pilling on bullish bets ac-

cording to the CFTC Commitments of Traders reports.

However, EQS does not feel oil prices are out of the woods yet. April and May will be tough

for the oil market in general while facing the spring season when demand is soft and invento-

ries build and consequently feel it’s too soon to eliminate the possibility of a bottom. Our

reluctance to get too excited about this upward trajectory revolves around the supply part of

the equation. While the current price level has caused many higher cost producers to shut in

production, overall production levels in the US and globally are still too elevated despite the

reduction in rig counts. Baker Hughes' weekly count of active rigs drilling for oil or natural

gas in the US hit the lowest level since the data series began at the end of 1948. The de-

cline in rig counts, com-

bined with stubbornly ro-

bust production, is an indi-

cation of how the industry

has become more efficient

at extracting oil and gas out

of the ground. A sustained

recovery in prices beyond

$40/bbl will depend on

whether the robust supply

outlook will continue. As

mentioned in last month’s

Signals, at price levels

above $30/bbl, 97% of the

producers can still operate

wells. With the demand

outlook improved and supply levels remaining high, it will be interesting to see if OPEC

moves beyond the production freeze into an outright cut. This move or further monetary

stimulus in the US could trigger a sustainable rebound in oil prices.

O I L PR I C E S - -NO T O U T OF TH E WO O D S YE T

The EIA revealed that monthly oil production is finally showing a year-on-year contraction.

Bullish

Bullish Factors Dominate



In early March, Henry Hub spot prices dropped to

their lowest level in 20 years. Temperatures were

warmer than normal in February which contributed

to the downward slide in prices.

Weather continues to signal additional losses for

natural gas in the near term. In its updated fore-

casts, the National Weather Service sees below-

average temperatures spanning much of the Mid-

Atlantic, fringes of the east-north-central U.S., nearly

all of the Southeast and a portion of the Gulf Coast

in the upcoming six- to 10-day period, as above-

average temperatures encompass the bulk of the

West and the edges of the west-central U.S. Aver-

age temperatures are called for a section of Mon-

tana, a majority of the central U.S., all of the North-

east and the balance of the Mid-Atlantic. In the

eight- to 14-day outlook, below-average tempera-

tures exit the U.S. and average temperatures signifi-

cantly shrink in scope to be contained to parts of the

Northeast and Florida, as above-average tempera-

tures overtake the bulk of the country. The domi-

nance of above-average temperatures in the latest

weather projections remain indicative of no

significant need for either cooling or heating

given the time of the year, particularly in the

major consuming Northeast and Midwest.

Tepid demand should reduce dependence on

gas storage and working gas stocks could

finish the heating season near record-high

levels. If withdrawals from storage follow the

five-year average for the remainder of the heat-

ing season, working gas stocks will total 2,336

Bcf on March 31–the traditional end of the

heating season. The record high for stock lev-

els at the end of the heating season occurred

in 2012, when working gas stocks totaled

NAT URA L GA S P RI C E S - -NEA R A TU RN IN G PO I N T

Bearish

2,473 Bcf on March 31, 2012, following a much

warmer-than-normal winter. Working gas stocks

are 727 Bcf above the five-year average and 911

Bcf above last year at this time.

Although the U.S. rig

count has declined to an

all-time low of 480 during

the week of March 11, dry

gas production for the

week of March 9 as re-

ported by the EIA was

0.1% higher than in the

previous week and 2.4%

greater than the level

hitherto from a year-ago.

Ongoing strong produc-

tion, despite a significantly diminished rig count,

alongside a lack of demand should allow for

stranded natural gas to end up in underground

storage facilities.

The good news is that technically speaking, natu-

ral gas prices have recently worked their way

upward to a critical resistance level. The monthly

bar chart of the 12-month futures strip shows that

natural gas prices are currently right at the key

resistance level that it has failed many times be-

fore. Although near-term indicators are bearish,

the market is forward looking and with the poten-

tial of a hot summer, increased natural gas power

generation capacity, and US LNG exports ramp-

ing up, the market could gain enough steam to

breach this level-which could indicate a turning

point for natural gas.

The 12-month futures strip shows

that natural gas prices are currently

right at the key resistance level that it has failed many

times before.

Natural Gas 12-Month Strip



Services

Through its subscription service, EQS Trading provides traders and

hedgers easy to follow trading signals for major commodity futures mar-

kets, including crude oil, natural gas, gold, silver and many others. Now,

strategies used by institutions and hedge funds are at your fingertips.

The subscription service includes both daily trading signals and the

weekly Signals Newsletter, which provides in-depth insight to the com-

modity markets.

EQS Capital Management also offers a commodity hedge fund (EQS

Commodity Fund LLC), which employs the same signals in its subscrip-

tion service in a private placement fund for accredited investors and

institutions. Because EQS uses a “long” and “short” strategy, it is de-

signed to generate returns, regardless of which way the market is mov-

ing. EQS Commodity Fund imbeds strict risk management principles

through

diversify-

ing its

portfolio

(energy,

metals,

and agri-

culture)

and ac-

tively

managing

stop loss limits.

About EQS

Economic Quantitative Strategy (aka EQS) is an investment and trading

strategy that translates economic data and technical indicators into price

direction for commodities. Because of its quantitative nature, EQS has

been rigor-

ously back-

tested with

15 years of

historical

data to

ensure the

strategy

works in a

variety of

market

conditions.

Further-

more, be-

cause the global economy changes over time, EQS employs dynamic

parameters that evolve as the market changes.

About Us

Management

Richard C. Rhodes

Mr. Richard C. Rhodes is the President and Founder of EQS Capital

Management LLC. Richard has a Bachelor of Science with honors in

Mechanical Engineering from Texas A&M University and an MBA

from Duke University. He brings almost 25 years of diverse energy

experience, covering all phases of the oil and natural gas value chain

from producer to end-user. Richard is a li-

censed Series 3 CTA (Commodity Trading

Advisor) with the Commodity Futures Trading

Commission and a member of the National

Futures Association.

Richard began his professional career on a

drilling rig in West Texas with Conoco Explo-

ration and Production. Richard continued his

oil and gas career with Koch Industries

(ranked as one of the largest privately-owned companies in the U.S.)

where he worked in midstream, refining, pipeline, and distribution

operations. During his eight years with Koch Industries, Richard be-

gan as an operations engineer and later found his true passion in

trading, which leveraged his professional interests in mathematics

and economics. Richard joined Duke Energy in 2002, where he spent

ten years working in the energy trading department and earned The

Pinnacle Award, the company’s highest honor. Richard then left Duke

Energy to launch EQS Capital Management in 2012.

Jonathan M. Lamb

Mr. Jonathan M. Lamb is the Director of Business Development at

EQS Trading. As a four year varsity hurdler

on the track team at Ball State University,

Jonathan earned Bachelor of Science de-

grees in Risk Management, Insurance, and

Economics, and started working on his PhD

in Economics at North Carolina State Uni-

versity before focusing on business and

trading.

As part of the first wave of Millennials to

join the work force, Jonathan started his

professional career almost 15 year ago,

joining ACES Power Marketing as an Operations Specialist, providing

demand side economics for Co-Op Power Providers before becoming

a Real-Time Electricity Power Trader. He continued his career trading

power for seven years with Progress Energy (now Duke Energy, the

largest utility in the nation) as a Senior Real Time Trader. Jonathan

then opted to become an entrepreneur and started a consulting firm

specializing in finance and economics, owning and running seven

different small businesses before joining EQS in 2015.



EQS Trading

A Division of EQS Capital Management, LLC

8480 Honeycutt Road, Suite 200

Raleigh, NC 27615

Phone: 919.714.7453

www.EQStrading.com

E-mail: [email protected]

Your use of this subscription is governed by these Terms and Conditions. You may print the documents published in hard copy for internal reference purposes, but not for any other purpose. Specifically, you may not copy, reproduce, distribute or modify the content. The information may be changed by EQS at any time without notice. While EQS will use reason-able efforts to ensure that the information is accurate and up to date, no representations or war-ranties are given as to the reliability, accuracy and completeness of the information. This material has been compiled and presented as general information, without specific regard to the particular circumstances or risks of any company, institution, or individual. It is not intend-ed as, nor should it be construed to be, investment advice. In no event will EQS, its affiliates, nor any of its officers, partners or employees be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of it, or in any connection with, your use of the Subscrip-tion or the failure of performance, error, omission, interruption, delay in operation or transmis-sion. Use of the Subscription Service shall be governed by all applicable Federal laws of the United States of America and the laws of the State of Delaware. The user hereby acknowledges and agrees that EQS may be harmed irreparably by any violation of this Agreement and that EQS shall be entitled to injunctive relief to enforce this Agreement. The information contained has been prepared solely for informational purposes and is not an offer to sell or purchase or a solici-tation of an offer to sell or purchase any interests or shares in funds managed by EQS. Any such offer will be made only pursuant to an offering memorandum and the documents relating thereto describing such securities. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. HYPOTHETICAL PERFORMANCE RE-SULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESEN-TATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMI-LAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPO-THETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RE-SULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HY-POTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN AD-VERSELY AFFECT ACTUAL TRADING RESULTS. THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD THERE-FORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FI-NANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION ("CFTC") REQUIRE THAT PROSPECTIVE CLIENTS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT'S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. YOU MAY REQUEST A COPY OF THE DISCLOSURE DOCUMENT BY EMAILING EQS. THE CFTC HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR ON THE ADEQUACY OR ACCURACY OF THE DIS-CLOSURE DOCUMENT. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIG-NIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. EQS CAPITAL LLC IS A CFTC REGISTERED COMMODITY TRADING ADVISOR AND COMMODITY POOL OPERATOR. PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A FUND OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT RE-VIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR THIS FUND. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EX-CHANGE COMMISSION (THE “SEC”) OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS AS A PRIVATE PLACEMENT MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-FENSE.

T H E S OU RC E

F O R C O MMOD ITY

T RA DING S IG NA LS

TERMS and DISCLOSURES

Newsletter 03202016 Final Volume 2 Issue 2

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