Day Hagan Catastrophic Stop Update April 14, 2026
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The Day Hagan Catastrophic Stop model increased to 63.64% from 59.09% last week. The increase was due to High-Yield option-adjusted spreads narrowing over the last week. The model indicates that investors should maintain benchmark equity exposure.
Figure 1: The model improved as credit spreads narrowed.
Recent narrowing of high-yield OAS suggests investors see less near-term default and recession risk and are demanding less compensation for credit risk—basically, a stronger risk appetite and easier financial conditions. Recent spread tightening appears broader than just U.S. high yield: U.S. investment-grade corporates, BBB corporates, euro high yield, and EM corporate credit also show narrowing in the current ICE BofA/FRED series. The move looks risk-on, though HY usually tightens more sharply.
Figure 2: Narrowing credit spreads are constructive for the equity backdrop.
High-yield bond breadth has continued to improve. The spike higher looks more like a breadth-thrust-type move we’ve seen following shorter-term washout events.
Figure 3: High-yield spreads tightened as participation broadened across the asset class.
Since 2005, there have been just 11 instances when high-yield bond breadth’s 10-day SMA surged from deeply bearish to bullish within 10 trading days, including April 10, 2026. In the prior 10 completed cases, forward S&P 500 returns were strong across horizons, with the best success (hit) rate at one month. The biggest gains came near market bottoms, while failures in 2008 and 2022 occurred during structural bear markets. Overall, it’s a bullish but imperfect signal.
Figure 4: The spike in bond breadth has historically been a tailwind for equities, on average. It remains part of our “weight of the evidence” appraisal.
Pessimism is showing signs of reversing. After dipping into the extreme pessimism zone, the sentiment composite bounced, which often means panic selling is easing and risk appetite is stabilizing. In context, that kind of rebound usually suggests improving near-term market tone, though a stronger signal would be a sustained move back above 30, followed by continued follow-through in the S&P 500.
Note (from last week’s Update): When sentiment falls below 20, marking an extreme pessimism reading, the near-term backdrop has historically remained difficult. Over the following month, the median return has been -0.6%, with only a 48% success rate, suggesting that the weakness driving sentiment to such depressed levels often persists for a bit longer.
Beyond that initial period, however, the rebound has typically been much stronger. The median 3-month return rises to 6.6%, with an 81% success rate, followed by a 15.8% median gain over 6 months with an 82% success rate, and a 16.5% median return over 1 year with an 83% success rate. Each of those longer-term outcomes stands well above baseline, underscoring that extreme pessimism has often been followed by a meaningful recovery (returns and success rates are considered hypothetical, as the start date uses data from before the model was developed to analyze a greater array of market conditions).
Figure 5: Sentiment reversing from extreme levels of pessimism is potentially constructive for the market from a contrary opinion perspective.
While sentiment, high-yield OAS, and equity breadth statistics were evidencing modest improvement, vol-targeting strategies were reducing equity exposure. This represents a potential source of future demand.
Figure 6: Vol-targeting strategies exhibit lower equity exposure, which is favorable from a contrarian perspective.
Last week, our proxy for managed futures funds, DBMF, showed the lowest equity exposure in three years. Even with last week’s rally, equity exposure remains relatively low. Again, another source of potential demand once a new uptrend is established.
Figure 7: Even with last week’s rally, systematic and algo-related strategies are underweight equity exposure. They’ll have to buy it back at some point.
Below is the updated chart showing performance since the Iran conflict began in earnest.
Figure 8: Did you say that oil prices are up 72.5% this year? (WTI Crude May ’26 contract.)
Currently, strategists forecast the S&P 500 to reach 7,561 by the end of this year.
Figure 9: A lot has to go right for the S&P 500 to meet the 7,561 forecast. Mostly, earnings will have to meet expectations, which, of course, is a function of revenues and margins.
The good news so far is that earnings expectations continue to rise. S&P 500 calendar year 2026 earnings growth is now expected to be 17.6%. Clearly, this is a direct response to increases in energy sector earnings outweighing higher costs driven by energy prices.
Figure 10: Earnings estimates continue to increase at the index level.
By Friday, April 10, futures pricing still implied no move as the base case through year-end 2026, with Reuters describing a roughly one-in-three chance of at least one cut by December following the March CPI report. Odds of a hike remained very small; earlier in the week, CME FedWatch-based reporting showed hike odds had fallen to about 0.8%, while the probability of holding at 3.50%–3.75% through December had dropped to 53.6%, and cut odds had risen.
Figure 11: The 2-year minus the Fed funds rate has proven a reliable proxy for potential Fed policy actions.
It is important to note that credit spreads (OAS) remain at the lower end of their long-term ranges. This indicates an orderly market in which fixed-income investors aren’t pricing in a major financial dislocation. Even with the problems in Private Credit.
Figure 12: OAS not spiking.
Last week, we illustrated the “yield curve” based recession probability model. This week, we’re highlighting the smoothed Chauvet-Piger U.S. recession probability model, which uses four coincident indicators: payrolls, industrial production, real personal income ex-transfers, and real manufacturing/trade sales. Readings above 50% have historically lined up well with NBER recessions. The latest reading is just 0.48% as of February 2026, essentially no recession signal, and close to the model’s historical median of 0.26%. S&P 500 data runs through April 10, 2026.
Figure 13: Through February, the Recession Probability model indicated very low recession odds.
The National Financial Conditions Index (NFCI) is a Chicago Fed measure of how easy or tight financial conditions are across markets, using data such as interest rates, credit spreads, leverage, and risk sentiment. Negative readings mean conditions are looser than average. Positive readings indicate tighter, more stressful conditions.
The NFCI (at -0.433) sits near the 57th percentile since 1999, modestly looser than the post-1999 average but not exceptionally easy. The Credit Sub-Index, at +0.015, is around the 60th percentile; despite recently crossing above zero, it remains slightly better than its post-1999 average, making the move more of an inflection than a stress signal. By comparison, current readings are nowhere near the extremes seen in 2001, 2008, or 2020.
Figure 14: Money is still flowing fairly normally, borrowing markets are okay, and today’s conditions look nowhere near the kind of financial stress seen during major crises like 2008 or COVID.
U.S. Economic Releases:
PPI and NFIB on Tuesday.
Beige Book on Wednesday.
Unemployment Claims on Thursday.
Too many Fed speakers…
Figure 15: Economic release calendar. Source: Forexfactory.com
Bottom Line: The weight of the evidence argues the market backdrop improved modestly over the past week. The Day Hagan Catastrophic Stop model rose to 63.64% from 59.09%, mainly because high-yield credit spreads narrowed, signaling lower perceived default and recession risk and a more constructive equity environment. High-yield bond breadth also strengthened sharply, a historically bullish, though imperfect, signal for stocks. Sentiment rebounded from extreme pessimism, suggesting panic selling may be easing, while systematic and volatility-targeting strategies remain underweight equities, leaving room for future buying. Other indicators also point to limited near-term stress: credit spreads remain relatively low, the Chauvet-Piger recession model shows minimal recession risk, and financial conditions are modestly loose rather than crisis-like. Risks remain, including elevated oil prices and the need for earnings growth to justify bullish S&P 500 forecasts, but overall, the evidence supports maintaining benchmark equity exposure.
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This strategy uses measures of price, valuation, economic trends, liquidity, and market sentiment to make objective, rational, and emotion-free decisions about how much capital to place at risk and where to allocate it.
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Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Sources:
https://www.3fourteenresearch.com/
This material is for educational purposes only. Further distribution is prohibited without prior permission. Please see the information on Disclosures here: https://dhfunds.com/literature. Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. All Rights Reserved. © Copyright 2026 Day Hagan Asset Management. Data sources: Day Hagan Asset Management, 3Fourteen Research, J.P. Morgan, Goldman Sachs, Barchart, StreetStats, Atlanta Fed, St. Louis Fed, Koyfin, Yardeni, MarketEar, S&P Global, SPDR, FactSet.
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S&P 500 Index—An unmanaged composite of 500 large-cap companies, this index is widely used by professional investors as a performance benchmark for large-cap stocks.
S&P 500 Total Return Index – An unmanaged composite of 500 large capitalization companies. Professional investors widely use this index as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Sentiment – Market sentiment is the prevailing attitude of investors toward a company, a sector, or the financial market.
OBOS Indicators—The overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price to the trade margin of the given period.
Purchasing Manager Indexes (PMIs) – survey-based economic indicators that provide timely insight into business conditions.
FOMC Meeting – The FOMC (Federal Open Market Committee) holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-term goals of price stability and sustainable economic growth.
Consumer Price Index (CPI) – Measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
OAS: OAS spreads are the extra yield a bond offers over Treasuries, after adjusting for embedded options, used to gauge credit risk and relative value.
Catastrophic Stop model — Proprietary model used to indicate suggested equity exposure levels.
CDS — Contract designed to transfer credit risk of a referenced borrower.
Success rate — Percentage of historical observations producing a positive stated outcome.
NFCI: The National Financial Conditions Index measures overall U.S. financial stress using rates, spreads, leverage, and sentiment; negative readings mean looser-than-average conditions.
NFCI Credit Sub-Index: The NFCI Credit Sub-Index tracks credit-market tightness via borrowing conditions and spreads; a rise above zero indicates tightening, though current levels remain non-stressful.
Recession Probability Model: The recession probability model estimates U.S. recession risk using payrolls, production, income, and sales; readings above 50% have historically aligned with recessions.
High-Yield Bond Breadth: High-Yield Bond Breadth measures how widely spread tightening or weakening occurs across junk bonds; broad improvement often signals a stronger risk appetite.
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