Day Hagan Catastrophic Stop Update April 28, 2025
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The Catastrophic Stop Model increased to 60.0%, up from 47.9% last week. The model recommends that investors maintain their benchmark exposure.
The model’s improvement resulted from both the Volume-Adjusted Demand/Supply Factor and High-Yield and Emerging Market Breadth Factor turning positive. The measures confirm the improvement in breadth for equities and fixed income.
Technicals
Sentiment: It's been about one month since Liberation Day (April 2), and it's been quite a ride. Investor sentiment remains pessimistic but is trending higher from lows that were on par with levels seen in 2020. A continuation of the reversal above 30 would be bullish, indicating that investors are turning more optimistic. A move above 70 would indicate a shift to excessive optimism, which would likely create near-term headwinds. In other words, based on sentiment alone, there is potential upside before sentiment-induced resistance levels are reached.
Figure 1: Day Hagan Daily Market Sentiment Composite.
Semiconductors signal risk-on: We also monitor semiconductor industry price trends for risk-on signs. The filling of the most recent gap on the upside is positive. At $211.34, the price crosses above the 40-day moving average. From a seasonality perspective, SMH has been up in May 73.3% of the time with an average gain of 7.8% since 2010. The worst loss during the month of May (over the past 14 years) was in 2019, with a decline of -15.50% (source: Barchart). Interestingly, the loss resulted from President Trump declaring a national emergency on May 15, 2019, allowing the U.S. to ban telecommunication equipment from companies deemed a security risk (Huawei). This hurt chip companies like Qualcomm, Intel, and Broadcom, which provided Huawei with chips. There were also issues of oversupply and declining prices, along with concerns around economic growth. Note: In 2018, Huawei and other Chinese tech firms stockpiled semiconductors in anticipation of the export controls. Chip sales peaked in October 2018. By early 2019, the stockpiles reduced new orders, contributing to a demand drop. From May 15th, 2019, through the 17th, the SOX index fell 7.9%. Importantly, our Information Technology sector model has moved to neutral levels from modestly underweight. And while the tendency has been for investors to eschew technology stocks in favor of defensive holdings, we note that the forward PE for the Information Technology sector is now 23.2x, vs. Consumer Staples at 22.1x (SP500 19.5x), narrowing the valuation spread quite a bit. Lastly, be aware that there could be more tariff-induced volatility around semiconductors (which have largely escaped tariffs to date).
Figure 2: SMH ETF trends help define risk-on vs. risk-off.
Semiconductor Industry Billings: The 3-month moving average of year/year semiconductor billings is positive but may be peaking. Stay tuned.
Figure 3: Semiconductor billings still trending higher, but we’re watching to see if a peak is confirmed.
Tech OBOS: Our shortest-term measure of overbought/oversold for the Info Tech sector just crossed into overbought territory. The move can continue higher (overbought and oversold conditions can remain in place longer than one might think), but should it reverse back below the upper band (blue line), it would generate a short-term sell signal.
Figure 4: The Information Technology sector is overbought on a very short-term basis.
Breadth: There have been a few breadth thrust buy signals (Zweig’s, for example). The chart below illustrates times the S&P 500 was up three days in a row, when day one was up over 1.5%, and days two and three were up over 1.1%. While cognizant of potential drawdowns, signals have generally been constructive. Also, as mentioned earlier, our Equity Breadth Factor generated a buy signal.
Figure 5: Equity and bond market breadth improving.
Overbought/Oversold: One of our Oversold Extreme indicators is based on the Russell 3000 52-week New Highs – New Lows. The recent sell-off hit levels that were “so bad, they’re good.” Another positive support.
Figure 6: Selling reached exhaustion levels.
Positioning: Based on the GS Equity Sentiment Indicator, positioning is still light. J.P. Morgan shows that “HF net leverage increased by 1% in each of the past 2 weeks across all strategies (it’s still at 6th %-tile on 12m basis and 25th %-tile over past 5 years). Equity Long/Short net exposure is 4th%-tile on a 12m basis and 35th%-tile over the past 5 years. CTA positioning in US equities has barely budged over the past 2 weeks (still <10th %-tile).”
Figure 7: Equity investors are underweight stocks.
Gamma: Gamma levels are still negative on balance, indicating that volatility will likely remain elevated (volatility can be elevated in both directions). Inflection levels (areas with significant open interest) are SPY 545 and 550. (Note: The SPY closed at 550.90 on Monday.) If you are targeting specific support and resistance levels, we recommend incorporating indicators evaluating important gamma strikes.
Figure 8: Negative gamma conditions persist.
Buybacks: Buybacks are back. The top 10 expected buybacks (in billions of dollars) are AAPL, GOOGL, META, NVDA, MSFT, WFC, JPM, V, GM, and XOM.
Figure 9: Buybacks are supportive overall.
Operating Environment
Tariffs: Still up in the air, but policy uncertainty measurements have declined, indicating that investors are getting more comfortable with the chaos. Our view is that we have seen the “high water mark” in tariffs. However, if the average effective tariff rate does rise to the 27%-28% level (the most negative projection we’ve seen), up from 2.5% at the start of 2025 (a pre-substitution rate), the table below identifies possible ramifications. Again, we don’t envision this happening, but we must understand the worst-case scenario to prepare for all possibilities. (Source: Yale.)
Figure 10: If tariffs are implemented without any “deals, " the following impacts could result. We assign a very low probability to this outcome.
Inflation: At this point in time, inflation pressures are decelerating and considered to be “Moderately Disinflationary.” While March’s CPI month/month result was “deflationary” (yes, it was negative -0.1%), we are watching closely to see if it is the calm before the storm. Currently, when reviewing the commodity complex, we see that grains, energies, livestock, and softs are broadly lower. Exceptions include Gold, Silver, High Grade Copper, Soybean Oil, Feeder Cattle, and Coffee. Net/net, prices are lower for most commodities YTD.
Figure 11: Inflation pressures remain tame so far.
Economic Outlook: We view economic data as supporting our expectations for mildly positive economic activity throughout the first half of 2025. We’ll be getting a lot of data on employment and manufacturing this week. While government statistics, JOLTS, and PMIs are relevant, we prefer the NFIB data for a more detailed understanding of the U.S. economic backdrop. As you can see, Soft data spiked higher following Trump’s re-election but has recently pulled back a bit. Hard data is also a bit lower. This dovetails with a broad range of consumer sentiment data. The concern is whether or not consumers start to delay purchases. So far, this hasn’t been the case. The Retail Sales report on May 15 will be watched closely.
Figure 12A: Economic activity holding up, but decelerating. Our recession-watch indicators have not yet triggered a warning.
Figure 12B: Economic activity holding up, but decelerating. Our recession-watch indicators have not yet triggered a warning.
Earnings: For Q1 2025, according to FactSet, 36% of S&P 500 companies have reported earnings, with 73% posting a positive earnings surprise (10-year average 75%) and 64% a positive revenue surprise (10-year average is 64%). So far, the y/y earnings growth rate is 10.1%. Profit margins are holding up with Q1 being the fourth consecutive quarter above 12% (so far). However, we are somewhat concerned by the chart below. Forward EPS trends are tracking more like a recession is coming. While this could be due to concerns around front-loading in anticipation of tariffs ultimately costing earnings in the second quarter (Q2 earnings estimates indicate 6.4% y/y growth, the lowest expectations over the next three quarters), it is still front and center for our investment team. Interestingly, FactSet claims that the bottom-up target price for the S&P 500 is 6,578.84 over the next 12 months, a 20% increase. If earnings continue to track lower, these forecasts will be ratcheted down.ively.”
Figure 13: Earnings are OK so far, but we will continue to monitor this chart for signs that problems may arise.
Earnings Revisions: Analysts have been revising their S&P 500 EPS expectations lower. Will tariff clarity unlock upside revisions, or has the damage been done? Currently, Goldman Sachs estimates a 2-3% reduction in earnings if maximum tariffs are sustained, with each 5% increase in the effective tariff rate cutting EPS by 1-2%. Bank of America projects a 10% EPS hit from 13% to 3% (the most negative view of those shown). JP Morgan sees real earnings being severely impacted if the tariffs stay at maximum levels. The potential for negative results includes expectations for increased input costs, retaliatory tariffs, and economic uncertainty impacting trade and capex. All are, in our view, worst-case scenarios. Too much pessimism?
Figure 14: Negative revision trends are concerning.
Interest Rates and Credit Spreads: Given the volatility, credit spreads are tame, which indicates markets are functioning well. Each of the OAS levels for the credit sectors shown below remains below their respective long-term averages.
Figure 15: Even with the “basis trade” blowout two weeks ago, OAS for agencies, mortgage-backed securities, U.S. Investment Grade Corporates, and High Yield are behaving.
Rate Cut Expectations: Expectations for rate cuts remain a tailwind.
Figure 16: Rate cuts expected. The bars below illustrate expectations for December 10, 2025.
Upcoming reports we’ll be watching closely:
Carney’s election and market reaction today
JOLTS Job Openings at 10:00 ET this morning (looking for 7.49 million)
Wednesday: ADP Non-Farm Employment Change (expected 123k), U.S. Advance Q1 GDP q/q expected up 0.4%, Employment Cost Index q/q (expected 0.9%), Core PCE Price Index m/m (expected 0.1%)
Thursday: Unemployment Claims (expecting 224k), Final U.S. Manufacturing PMIs
Friday: Non-Farm Employment Change (expected 129k, down from 228k last month), Average Hourly Earnings m/m (expected 0.3%)
Conclusion
The Catastrophic Stop model indicates that the U.S. equity market will likely maintain levels above recent lows, though a retest cannot be entirely dismissed. Oversold conditions persist, driven by significant market fear, though off the worst levels. Economic indicators are moderately supportive, with inflation rates continuing to slow. While tariff and policy uncertainties remain high, they have declined from their peak observed on April 5. We do not foresee a resurgence of tensions, considering the initial round of tariffs as the "high water mark." Positive earnings growth continues, and if Q1 results align with expectations, the recent rally is likely to persist. U.S. dollar sentiment is nearing extreme pessimism, echoing conditions from last August, suggesting possible support levels. If the dollar stabilizes, both foreign and some U.S. investors may increase their stakes in U.S. assets (stocks and bonds) over international options, which would be a positive development. Despite the market volatility over the past month, credit spreads are stable, indicating normally functioning financial markets, with OAS levels for credit sectors remaining below their long-term averages. Analysts have generally lowered S&P earnings forecasts, with Q2 expected to show the weakest y/y growth and the back half of 2025 rising again. Positioning remains light according to the GS Equity Sentiment Indicator, with J.P. Morgan noting that even with the recent increases in hedge fund net leverage, levels are still below historical norms.
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.
OBOS Indicators – Overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price with the trade margin of the given period.
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.
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.
JOLTS Report – Is a monthly report from the U.S. Bureau of Labor Statistics (BLS) that provides information on the state of the job market.
Core Personal Consumption Expenditures (PCE) price index – Is an economic indicator that measures inflation in the Unite dStates by tracking the prices of goods and services that consumers purchase, including food and energy costs.
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