Day Hagan Catastrophic Stop Update April 21, 2025
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The Catastrophic Stop model level remains at 47.9%, the same as last week. The model recommends that investors maintain their benchmark exposure.
Technicals:
Overbought/Oversold: Most of our measures evaluating oversold conditions remain significantly oversold. Reversals back above the corresponding signal thresholds would be bullish. If the reversal of oversold conditions is accompanied by a series of breadth thrusts (featured in previous Updates), then we would view the emerging uptrend as sustainable.
Figure 1: Oversold conditions in place
Sentiment: Overall, sentiment remains excessively bearish, which, from a contrary perspective, is constructive. We note that Smart Money Confidence (shown last week) remains near 10-year highs. Sentimentrader notes that current levels suggest an excess return of 4.4% over the next two months.
Figure 2: Sentiment is excessively pessimistic.
Positioning: 3Fourteen Research (one of our model and indicator research providers) shows that Vol-Targeting Strategies have derisked significantly. Levels are similar to what was registered at the 2020 low. JP Morgan notes that Hedge Fund net leverage is now at the 12th percentile (low exposure) based on the past five years. CTA positioning is at the 7th percentile (very low exposure) for the U.S. based on a 5-year lookback. These will be sources of demand once the trend reverses.
Figure 3: Systematic traders underweight equities.
To track CTA exposure levels, 3Fourteen evaluates the DBMF ETF’s exposure to S&P 500 futures. 3Fourteen writes, “DBMF tracks the SocGen Managed Future Index, which is an amalgamation of the largest CTA strategies. In March, positioning flipped net short S&P 500 futures (purple line).” Furthermore, “History argues the market will chop and retest the April lows. However, vol-targeting funds, inverse ETFs, and CTAs have all moved into a pessimistic posture. Sentiment is in the neighborhood of a market bottom.”
Figure 4: CTAs underweight equities.
Death Cross: Much has been made of the S&P 500’s 50-day MA crossing below the 200-day MA (the proverbial “Death Cross”). NDR notes that “For the S&P 500, back to 1928, the average return from ‘death cross’ to ‘golden cross’ signals is positive (1.4%) though the average return from ‘death cross’ to the market’s intervening low is -12.2%. On average, it has taken 86 days for the market to bottom following a ‘death cross’ and 69 days from the bottom to return to a ‘golden cross.’ Unsurprisingly, ‘death cross’ signals that have occurred during bear markets (which can’t be identified in real-time) have been considerably worse. Returns to the next ‘golden cross’ averaged -3.3% while returns to the intervening market low averaged -18.4%. ‘Death crosses’ during recessions paint more of a mixed picture. The average return from ‘death cross’ to ‘golden cross’ is a healthy 7.8% though the average return to the market low is a worse -16.3%. Notably, there was not a ‘death cross’ signal during the 2001 internet recession.”
Figure 5: A death cross is not necessarily a death sentence unless there is a recession.
Operating Environment:
Tariff Uncertainty is still a major force in the market. Economic policy uncertainty levels have retreated from the early-April highs but are starting to inch back up. Concerns are building that tariffs will significantly undermine economic activity. Our view is that if economic indicators continue decelerating, the 90-day pause will likely be extended. There are a couple of wildcards: 1) Will recent lawsuits questioning Trump’s authority to levy tariffs (by declaring a national emergency) be successful, and 2) are there more tariffs to come? Our view, as stated last week, is that the initial volley of tariffs is the high-water mark for most trade relationships.
Figure 6: Policy uncertainty remains a major headwind.
Economic Outlook: The Conference Board’s Leading Economic Index came in worse than the expected decline of -0.5, down -0.7% for March. The Conference Board noted, “March’s decline was concentrated among three components that weakened amid soaring economic uncertainty ahead of pending tariff announcements: 1) consumer expectations dropped further, 2) stock prices recorded their largest monthly decline since September 2022, and 3) new orders in manufacturing softened. That said, the data does not suggest that a recession has begun or is about to start. Still, the Conference Board downwardly revised our US GDP growth forecast for 2025 to 1.6%, which is somewhat below the economy’s potential. The slower projected growth rate reflects the impact of deepening trade wars, which may result in higher inflation, supply chain disruptions, less investing and spending, and a weaker labor market.” Outside the LEI’s message, the NDR Economic Timing Model remains at levels supporting a “Strong Growth” outlook. Our view continues to be that economic growth is decelerating but will remain positive. However, it is unlikely that trend growth will be seen again until trade tensions are relieved.
Figure 7: The recent LEI report shows economic deceleration, but not a recession.
The Atlanta Fed’s GDPNow real GDP estimate for Q1 2025 is -0.1%, adjusting for the importing and exporting of gold. Importantly, the Trade Deficit deducts -4.91 percentage points from the overall value. For perspective, from the start of Q1 2025 through February 26, the Trade Deficit deducted only around 0.4 percentage points from the GDPNow total. Then, tariff levels were released, and corporations front-loaded ordering, and the value plummeted.
Here’s the breakdown: On February 28th, the Trade Deficit deduction jumped from -0.41 percentage points to -3.7 percentage points (as we pointed out at the time). As of April 17th, it is -4.91 pp!
The current Q1 GDPNow forecast (not adjusting for gold trade) is -2.2%. If one uses a “normalized” Trade Deficit deduction of -0.4 pp instead of the “tariff-induced” -4.9 pp, the forecast would show positive Q1 GDP expectations of +2.3%. (Closer to the Economic Timing Model’s output.) Of course, adjusting for gold would take the forecast even higher.
Figure 8: GDPNow model forecast negatively impacted by trade deficit, including gold imports.
Inflation Outlook: Remember that current inflation forecasts hinge on tariff expectations, and it is nearly impossible to call what will ultimately happen. One-year expectations are still all over the board. However, longer-term inflation expectations appear “well anchored.”
Figure 9: Inflation pressures are currently decelerating. The 5-year breakeven inflation rate is heading toward 2%.
Earnings Outlook: Bottom-up estimates still call for 10% year-over-year growth in 2025. However, the chart below gives us pause. This needs to turn back up soon.
Figure 10: Earnings need to stabilize, or multiples will eventually be impacted.
Interest Rates and Credit Spreads: When reviewing the equity markets' decline relative to the widening of High-Yield credit spreads, the current relationship appears to be “tracking the non-recessionary path for now.”
Figure 11: High-yield credit spreads' reaction to the equity decline is currently viewed as describing a non-recessionary environment.
While credit spreads have clearly widened, current levels are on par with those seen during the October 2023 lows. Given the market’s decline, we view credit spreads as indicating that the fixed-income markets are handling equity volatility well. We are watching closely for signs that this is no longer the case. Note: Our OAS indicator within the Catastrophic Stop triggered a sell signal on March 10th (second chart below).
Figure 12: High-yield OAS consistent with the 2023 market lows.
Figure 13: A reversal would be bullish.
U.S. Dollar: Today, the U.S. dollar index fell to its lowest level since February 2022. Tensions between President Trump and J. Powell seemingly ignited today’s decline, but the trend has been lower all year. Tariffs, investors selling U.S. and buying international, the Japan carry trade, and the U.S. Treasury basis trade are all culprits. Perhaps overlooked, given the other factors influencing the dollar’s trend, is that history shows that every 1% decline in the U.S. dollar has increased the S&P 500’s EPS by about 0.5% due to our exports being cheaper, and about 40% of the S&P 500’s revenues are generated overseas. Nonetheless, the DSI Sentiment index for the U.S. dollar is approaching levels of extreme pessimism.
Figure 14: U.S. dollar sentiment nearing levels denoting excessive pessimism.
Rate Cut Expectations: While the FOMC has been in a “wait and see” mode, investors are betting they’ll resume cuts. As we wrote last week, “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% (now 1.0%) probability that the Fed funds rate will be at current levels by December 10. There’s an 81.1% (now 91.4%) 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 15: The Fed could change the course of the market quickly.
Upcoming reports we’ll be watching closely:
There will be another 2-year Note Auction on Tuesday ($69 billion). While not as meaningful as the 7-year and longer maturities, this will help identify foreign investor trends. The last auction in March indicated strong demand. The bid-to-cover was 2.85, above the recent average, with indirect bidders, including foreign investors, showing strong demand as well.
The U.S. Flash PMIs are scheduled for release on Wednesday. The Manufacturing PMI is expected to come in at 49 (down from 50.2), and the Services PMI at 52.8 (down from 54.4).
The Beige Book will be released on Wednesday. Folks will be looking for clues as to the FOMC’s mindset.
Durable Goods on Thursday. Expected +1.9% (m/m) vs. +0.9 % last month.
In conclusion: As we wrote last week, “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. U.S. dollar sentiment measures are closing in on extreme pessimism (similar to August 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.” To be clear, the model is on the verge of a sell signal. If our economic factor shifts to negative, indicating that a recession is more likely, the model would be expected to raise cash, which would be done 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 capital.
If 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.
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.
Credit spread – The difference between two debt securities with different credit ratings but similar maturities. It is a common way to measure how much of a premium an investor might receive for taking on more risk.
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.
FOMC Meeting – The FOMC (Federal Open Market Committee) 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.
Purchasing Manager Indexes (PMI) – Purchasing Managers’ Index is a survey-based economic indicator designed to provide a timely insight into business conditions.
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