Day Hagan Catastrophic Stop Update April 20, 2026
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The Day Hagan Catastrophic Stop model rose to 81.82%, up from 63.64% last week. The improvement was driven by the Stock/Bond factor reversing to a buy signal for equities, along with stronger short-term measures of economic activity. This follows the narrowing in High-Yield option-adjusted spreads discussed two weeks ago and the previously noted improvements in both equity and High-Yield bond breadth. The model continues to indicate that investors should maintain benchmark equity exposure.
Figure 1: The model improved as credit spreads narrowed. However, many of the indicators remain poised to revert to neutral or sell if the market decisively reverses
As of April 20, U.S. stocks appear more attractive than bonds because earnings growth remains strong, while long-term Treasury yields remain under pressure from heavy issuance and sticky inflation, limiting bonds' appeal. Fund flows support that view: investors have been moving money into ETFs, especially U.S. equity and technology funds, while traditional mutual funds and money market funds have seen outflows. In other words, capital has recently been rotating toward stocks rather than cash or longer-duration bonds.
Our view is that the recent shift looks more like a rotation back toward equities than a full abandonment of fixed income.
Figure 2: Relative strength improvement in equities over bonds. Reversal from relative “oversold” conditions.
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.
As noted last week, since 2005, there have been just 11 instances in which high-yield bond breadth’s 10-day simple moving average has surged from deeply bearish to bullish within 10 trading days, including April 10, 2026. In the prior 10 complete cases, forward S&P 500 returns were strong across horizons, with the highest 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. This has proven to be the case so far this time around.
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.
Sentiment has recovered from deep pessimism into neutral territory, which remains constructive for equities.
Historically, when sentiment falls below 30—an extreme-pessimism reading—the near-term backdrop has tended to remain challenging. Over the following month, the median return was -0.6%, with a 48% success rate, suggesting that the forces driving sentiment to such depressed levels often persist a bit longer. The most recent drop below that threshold occurred on March 10, and it has now been just over a month.
Beyond that initial period, however, forward returns have historically improved meaningfully. 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 12 months with an 83% success rate. These returns and success rates are hypothetical, as the analysis uses start dates prior to the model's deployment to capture a broader range of market environments.
Figure 5: Sentiment reversing from extreme levels of pessimism remains constructive for the market from a contrary opinion perspective.
This chart shows a meaningful improvement in market breadth. With 72.2% of Russell 3000 stocks above their 50-day moving average, short-term breadth has become elevated, but the 56.4% reading above the 200-day moving average suggests the market is not broadly overheated. That makes the latest surge look more like a bullish breadth thrust-style recovery from washed-out levels than a classic overbought warning, though it may not meet the strict definition of a formal breadth thrust.
Figure 6: The recent improvement in breadth is likely more indicative of a breadth-thrust type move than a market heading into overbought resistance.
The message from the NASDAQ is similar: the chart below suggests the index has regained strong upside momentum after a recent pullback, but it is now becoming stretched in the short term.
Price has rebounded decisively and sits above its 50-, 100-, and 200-day moving averages, which is bullish for the intermediate trend. Volatility has also eased, with the VXN at 21.57, indicating fear has cooled, and conditions are more stable. At the same time, the 14-day RSI has jumped to 96.0 and the 5-day RSI average to 78.6, both well into overbought territory.
So, the message is: the trend is bullish, but the move has become unusually extended and may be vulnerable to a near-term pause or pullback.
Figure 7: While there may be a short-term pullback, other indicators continue to support the tech complex.
This chart suggests volatility-targeting strategies are now likely underexposed to equities relative to their recent history. The rolling 5-year Z-score has fallen below zero and is near -1, indicating that these strategies have reduced equity exposure as volatility has risen.
That matters because if market volatility continues to ease and equities keep moving higher, vol-targeting strategies may need to add back exposure, making them a potential source of incremental demand. In that sense, current positioning looks less like a headwind and more like dry powder that could be forced to chase a sustained upmove.
Figure 8: Vol-targeting strategies exhibit lower equity exposure, which is favorable from a contrarian perspective.
This chart suggests that DBMF is also underexposed to equities and could become a source of demand if the market continues to rise. DBMF’s S&P 500 exposure has fallen to about -12.95%, meaning it is currently positioned modestly short rather than long.
That matters because if the recent rally continues, DBMF may need to cover shorts and rebuild long exposure, creating incremental buying pressure. In that sense, current positioning looks like potential fuel for an upmove, as systematic trend-followers may be forced to chase strength rather than lead it.
Figure 9: Even with last week’s rally, systematic and algo-related strategies are relatively 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. It is also worth noting that the 10-year Treasury yield stood at 3.97% on March 27, then surged to 4.44% before easing to 4.26% as of this writing. In other words, U.S. equities have continued to climb despite war-related uncertainty, higher interest rates, private credit concerns, and other potential headwinds that the market has largely looked through so far.
Figure 10: Thank goodness for quantitative, unemotional models. It would have been very easy to get bearish.
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 18.0%. Clearly, this is a direct response to increases in energy sector earnings outweighing higher costs driven by energy prices.
FactSet notes that for Q1 2026, “the blended (year-over-year) earnings growth rate for the S&P 500 is 13.2%. If 13.2% is the actual growth rate for the quarter, it will mark the sixth-straight quarter of double-digit (year-over-year) earnings growth reported by the index.”
Also, according to FactSet, “The Information Technology sector is reporting the highest (year-over-year) earnings growth rate of all eleven sectors at 45.1%. At the industry level, all 6 industries in the sector are reporting (or are projected to report) year-over-year earnings growth: Semiconductors & Semiconductor Equipment (95%), Electronic Equipment, Instruments, & Components (32%), Technology Hardware, Storage, & Peripherals (26%), Software (18%), Communication Services (14%), and IT Services (5%). The Semiconductors & Semiconductor Equipment industry is also the largest contributor to the sector's earnings growth. If this industry were excluded, the blended earnings growth rate for the Information Technology sector would fall to 20.3% from 45.1%.”
Figure 11: Earnings estimates continue to increase at the index level.
Also, according to FactSet, the “Magnificent 7” are still expected to outgrow the other 493 S&P 500 companies in Q1 2026, with earnings growth of 22.8% versus 10.1%. But NVIDIA drives much of that gap: excluding NVIDIA, Magnificent 7 growth drops to 6.4%, below the other 493. The same pattern holds for full-year 2026, with estimated growth of 24.6% versus 15.9% (or 13.2% excluding NVIDIA).
Figure 12: Ex-NVIDIA, Mag 7 earnings growth is below the “Other 493.” This supports diversification.
By Friday’s close, energy prices and vol were showing signs of peaking. Weekend news changed that dynamic. At this point, we continue to view an extended closure of the Strait as the largest risk to the uptrend.
Figure 13: Who knows when supply chains will return to normal? We’re not convinced this is over yet.
Markets are currently pricing the Fed to hold steady in the near term, with only a small chance of a hike or cut at the next meeting. For later in 2026, expectations still lean toward higher-for-longer, with no cut remaining the base case, while modest easing is still possible and hikes remain a tail risk rather than the main expectation.
Figure 14: 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 15: OAS not spiking.
The 1-year breakeven has declined sharply from its recent spike. While it still stands at 3.35%, it had moved noticeably higher before pulling back, so the market is no longer pricing in the same degree of immediate inflation pressure as at the recent peak. That said, the decline does not mean short-term inflation concerns have disappeared. Rather, it suggests the most acute inflation fears have eased, even as near-term expectations remain elevated relative to longer-term breakevens. In other words, the panic has cooled, but the market is not fully at ease.
Figure 16: Breakeven rates indicate that inflation is “well anchored.”
U.S. Economic Releases:
Last week’s data suggested a mixed but still-growing U.S. economy with little sign of renewed inflation pressure. Jobless claims fell to 207,000, regional manufacturing surveys improved, and foreign demand for U.S. assets was solid. But industrial production fell 0.5%, capacity utilization slipped, homebuilder sentiment weakened, and existing home sales missed expectations. On inflation, core Producer Price Inflation rose just 0.1%, pointing to a softer pipeline backdrop even as headline PPI stayed firmer.
Retail Sales Tuesday. Also, ADP Weekly Employment Change.
Warsh at 10:00 ET on Tuesday. Watch for Warsh’s stance on Fed independence, inflation credibility, balance-sheet policy, and broader Fed reform. Markets will also focus on whether the hearing improves or complicates his path to confirmation.
Unemployment Claims on Thursday, along with Flash PMIs.
No, I don’t pay attention to the UoM reports.
Figure 17: Economic release calendar. Source: Forexfactory.com
Bottom Line: The Day Hagan Catastrophic Stop model improved to 81.82%, supporting benchmark equity exposure as credit spreads narrowed, economic activity firmed, and breadth improved across equities and high yield. Sentiment has rebounded from extreme pessimism into neutral, a backdrop that has historically favored stronger medium-term returns. Breadth measures suggest a bullish thrust-style recovery rather than a classic overbought warning, though the NASDAQ appears stretched enough to invite a short-term pause. Systematic strategies, including vol-targeting funds and DBMF, remain underexposed and could become incremental buyers if markets continue higher. Stocks also appear more attractive than bonds, helped by stronger earnings growth and favorable ETF flows. Earnings expectations continue to rise, though much of the Magnificent 7 advantage still depends on NVIDIA. Meanwhile, markets have largely looked through war, higher Treasury yields, and private credit worries. Inflation expectations have eased from recent peaks, credit spreads remain orderly, and the Fed is still expected to stay on hold.
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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.
Disclosures
The information contained herein is provided for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. The securities, instruments, or strategies described may not be suitable for all investors, and their value and income may fluctuate. Past performance is not indicative of future results, and there is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. Investing involves risks, including loss of principal.
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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.
Russell 3000: The Russell 3000 Index measures the performance of approximately 3,000 largest U.S. public companies, representing about 98% of the investable U.S. equity market.
PPI: PPI, or the Producer Price Index, tracks average price changes producers receive for goods and services, offering an early signal of inflationary pressure.
DBMF: DBMF is an actively managed futures ETF that aims to mirror hedge fund trend-following strategies by using long and short futures positions across stocks, bonds, currencies, and commodities.
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