Day Hagan Catastrophic Stop Update April 15, 2025
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The Catastrophic Stop model increased to 47.9% from 40.7% last week due to one of the model’s Trend Factors shifting positive. Supporting the Trend Factor are measures tracking Oversold Mean Reversion (showing that the markets reached extreme oversold levels and selling exhaustion), Sentiment (pessimism reached extreme levels similar to 2002, 2009, and 2020), and still-OK (but below trend) Economic Activity (the Baltic Dry Index is improving and the JPM Global Manufacturing PMI for New Export Orders [covering 40 countries and 98% of global manufacturing] rose to 50.1 in March signaling improved trade conditions for the first time in months).
Negative Factors include Stock/Bond Relative strength, Global Equity Breadth, Volume-Adjusted Equity Demand, and, perhaps most importantly, High-yield Option-Adjusted Spreads. Neutral Factors include the absence of an intermediate-term Breadth Thrust (which would strongly confirm that the uptrend has resumed), and High-Yield and Emerging Market Bond Breadth (indicating risk-off versus risk-on).
Figure 1: Oversold levels reached were consistent with previous significant lows.
Figure 2: The Oversold Mean Reversion Factor shows that the markets registered their fourth most-oversold level since 1980, on par with levels seen in 1987 after Black Monday.
To confirm that the downside is played out, we’d like to see our Trend and Breadth Thrust Factors register buy signals. Several shorter-term measures (5- and 10-day) are now positive, but we require confirmation from our intermediate-term measures to declare that the secular uptrend is back on track.
Figure 3: Buy signals from our series of Breadth Thrust indicators have historically identified good times to put money to work.
Something as simple as the market rallying three days in a row (Day 1 > 1.5%, Day 2 > 1.1%, Day 3 > 1.1%) would help support a more bullish outlook.
Figure 4: Strong three-consecutive-day rallies have historically identified better risk/reward opportunities.
Sentiment levels have reversed a bit from excessive pessimism, but there is plenty of room for improvement (a good thing; investors didn’t flip right back to overly optimistic positioning). This composite’s performance statistics are based on the absolute level rather than a directional perspective, as seen in the stats boxes at the bottom of the chart.
Figure 5: Sentiment levels showing this much excess pessimism have typically exerted a tailwind for stocks.
We also look at sentiment from a “where’s it been and where is it now” perspective. The chart below shows that when the composite reverses back above 40, equity market gains have been far better than when the composite has crossed below 70. We prefer this approach to sentiment, given that sentiment can stay pessimistic (or optimistic) for extended periods of time. In fact, the way we “rate” this indicator is that if it reverses above 40, but then loses steam and reverses back below 40, we rate the signal as neutral.
Figure 6: A sustained move back above 40 would be bullish and confirm that investors are risk-on.
The Smart Money Confidence (courtesy: Sentimentrader) composite includes measures of put/call ratios, open interest, commercial hedgers, and stock/bond trends. The current reading shows the highest Smart Money Confidence in nearly 20 years.
Figure 7: Smart Money Confidence is bullish.
U.S. economic data over the past couple of weeks has actually been okay. Today we saw that import prices were down 0.1% after 5 months of increases. The Core PPI was down -0.1% vs. +0.3% expected, while the PPI headline number was down -0.4% vs. +0.2% expected. CPI also came in at -0.1% vs +0.1% expected, and y/y was 2.4%, down from 2.8% previously. Average hourly earnings were up 0.3% vs. 0.2% the month before, and employment has been solid (Non-Farm Payrolls up 228,000 vs. 140,000 expected). Even the trade deficit was narrower than expected. So far…
We’re watching closely for indicators like the Citigroup Economic Surprise Index, which focuses on the previous three months, to reverse back above 0, indicating that investors’ expectations have aligned with economic reality.
Figure 8: Over the past three months, economic releases have come in below expectations (on average). However, recent data releases have beaten expectations. We are looking for this indicator to improve.
Earnings will be key to the rally's sustainability. Reviewing the 4-11-2025 FactSet Earnings Insight Update, they note that year/year S&P 500 earnings growth is expected to be 7.3% for Q1 2025, +8.2 % for Q2, 10.8% for Q3, and 10.3% for Q4. If these numbers come through, it would be supportive. Surprisingly, given the massive volatility over the past couple of weeks, earnings estimates are higher than what was expected on March 31.
Figure 9: Earnings growth will be key, and expectations are now actually higher than March 31 levels.
Figure 10: Calendar year 2025 earnings expectations still constructive, although the trend has been lower since March 31. (Q2 earnings expectations are down from 9.2% on March 31 to 8.2% currently.)
It's also important to keep in mind that the Fed is leaning toward stimulus now, not hiking rates. There’s just a 0.3% probability that the Fed funds rate will be at current levels by December 10. There’s an 81.1% probability that the Fed funds rate will be cut by three or more (25-bps cuts) times by December 10. Slowing down the balance sheet runoff is also seen positively.
Figure 11: The Fed is a bullish support. The chart below illustrates market expectations for the December 10, 2025, meeting.
In conclusion, the Catastrophic Stop model’s weight-of-the-evidence message is that the U.S. equity market will likely hold above the recent lows, although we can’t rule out a retest. Significant oversold conditions remain in place, with extreme fear still permeating the markets. Overall, economic releases have been moderately supportive, and inflation measures continue to decelerate. Tariff uncertainty, along with other measures of policy uncertainty, remains elevated, though levels have retreated from the peak registered on April 5. We are not currently anticipating a reignition of tensions (we view the initial volley of tariffs as the “high water mark.”) Earnings growth is positive, and should Q1 results continue to affirm expectations, the recent rally will likely continue. We didn’t show a chart of the U.S. dollar’s decline, but current U.S. dollar sentiment measures are closing in on extreme pessimism (similar to August of last year), indicating support levels may be building. If the dollar were to stabilize, we think that foreign (and a contingent of U.S.) investors may once again seek to increase exposure to U.S. assets (stocks and bonds) over international. Clearly, this would be supportive.
And as always, if our model should shift to a sell signal, we will raise cash immediately.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk and where to place that capitalIf you would like to discuss any of the above or our approach to investing in more detail, please don’t hesitate to schedule a call or webinar. Please call Tyler Hagan at 941-330-1702 to arrange a convenient time.
I hope you have a wonderful week,
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
This material is for educational purposes only. Further distribution is prohibited without prior permission. Please see the information on Disclosures and Fact Sheets 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 2025 Day Hagan Asset Management.
Figure 12: Chart of the Day - U.S. Economic Policy Uncertainty Index. Current value = 540.2 as of 4-14-2025.
Disclosures
S&P 500 Index – An unmanaged composite of 500 large capitalization 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. This index is widely used by professional investors as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Sentiment – Market sentiment is the current attitude of investors overall regarding a company, a sector, or the financial market as a whole.
Russell 3000 Value Index - Is a market-capitalization weighted equity index maintained by the Russell Investment Group and based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform by including only value stocks.
Oversold Mean Reversion factors – Mean reversion trading strategies use technical indicators to identify when assets are oversold or overbought, which can signal a potential return to average prices.
Purchasing Manager Indexes (PMI) – Purchasing Managers’ Index is a survey-based economic indicator designed to provide a timely insight into business conditions.
Option Adjusted Spread (OAS) - The measurement of the spread of a fixed-income security rate and the risk-free rate of return (the theoretical rate of return of an investment with zero risk), which is then adjusted to take into account an embedded option.
Baltic Dry Index Factor - Is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel. The Baltic Dry Index is a composite of four sub-indices that measure different sizes of dry bulk carriers or merchant ships: Capesize, Panamax, Supramax, and Handysize.
Producer Price Inflation (PPI) – Measures the average change over time in the prices domestic producers receive for their output. It is a measure of inflation at the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and product category.
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 pcires for a basket of goods and services representative of aggregate U.S. consumer spending.
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