Day Hagan Catastrophic Stop Update April 8, 2025
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The Catastrophic Stop model level is 40.7%, down from 51.4% last week and on the cusp of a sell signal. The model’s decline was due to volume-adjusted demand falling below volume-adjusted supply for the first time since September 2023. On balance, the model’s technical indicators are bearish, while the external indicators are low-neutral.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return
Why is the external component just “low-neutral,” holding the model from issuing a sell signal? The model’s external indicators are designed to call the operating environment for equities by evaluating measures of economic activity, inflation, and how well the market is functioning (e.g., rate structures, market liquidity, and sentiment trends). The model is currently recognizing the market’s recent weakness (with the technical indicators turning negative) but continues to portray an investing backdrop characterized by still positive (though decelerating) economic growth, inflation heading directionally lower, and sentiment excessively pessimistic.
In our parlance, this indicates that the recent decline isn’t expected to downshift into a larger bear market. It’s important to note that “big bear markets” have historically been accompanied by a recession within the next 12 months, and while the Street’s probabilities are being ratcheted up, most still assign a relatively low probability. We’d also note that Friday’s decline was essentially the result of a headline (China retaliating) and not the market breaking. In fact, end-of-day reports indicated that markets were orderly. We also all saw how the markets are likely to react should tariff negotiations reduce tensions, which we view as likely (on Monday, markets reversed higher by 8.7% intraday due to a false rumor that the tariffs would be postponed).
We discussed the implications in our Smart Value portfolio update on Monday, stating, “The most important question going forward is ‘Is this the peak for U.S. tariff levels?’ We suspect that it is very close, meaning that, potentially, most of the bad news related to the U.S. enacting tariffs and the levels is out. That implies that the market is primed for good news should countries acquiesce and begin to lower their tariffs on U.S. goods and services. When the news came out on April 2 (Thursday), we noted at the time that equities, while down significantly, performed better than we would have expected given the magnitude and ‘shock value’ of the announced actions. It wasn’t until China retaliated that the decline of the equity market accelerated. This epitomizes the binary outcomes expected relative to ‘tariff retaliation’ versus ‘coming to the table.’ It’s important to recognize that over the past three weeks, prior to the announcements, equity markets have spiked higher each time a major trading partner has announced that they will work with the U.S. to lower barriers to trade. Several outlets suggest that further escalation is possible, as numerous countries are reportedly actively discussing retaliatory tariffs. However, we’ve heard this before, and so far, other countries have relented. President Trump retains the authority to enhance tariffs in response to international retaliation, which is both a wildcard and a deterrent to escalation.”
Figure 2: The Economic Timing Model portrays an environment conducive to moderate economic growth
Based on a quantitative, unemotional appraisal, inflationary pressures are back to the “Moderate Disinflation” zone. Supporting this outlook are the recent weakening in our basket of commodity prices (just 31.5% are above their 200-day moving averages), energy prices plummeting, regional declines in rental rates (Texas, Florida, California), and slowing high-frequency indicators of consumption.
Figure 3: Inflation Timing Model’s message is Moderate Disinflation
Should our indicators calling the external environment shift negative, we will increase cash immediately.
Portfolio Note: Since the beginning of February, our sector work has been allocating more defensively, supporting returns. As of the April 1 update, that trend remains in place. However, we added positions in Alphabet and Nvidia on Monday morning to true-up exposure relative to the benchmark (due to the RIC rules and capping discussed in previous updates—please call me if you would like more details).
Turning to the technicals, oversold levels are consistent with previous major lows that occurred without a recession for the next 12 months. For example, our shortest-term oversold measure has issued a second buy signal. As detailed in previous updates, we then look for confirmation from our intermediate-term measures since the shorter-term indicators can be early.
Figure 4: Short-term oversold conditions in place.
Our Breadth Factor for the Russell 3000, a proxy for intermediate-term oversold conditions, is now at levels similar to what was indicated at the 2022 lows.
Figure 5: New Highs – New Lows nearing levels where selling has previously exhausted.
Another of our intermediate-term oversold measures, the Russell 3000 Ratio of Advancers plus ½ Unchanged to Total Issues, also just issued a buy signal.
Figure 6: The percentage of advancing stocks in the Russell 3000 has reached levels where bottoms have formed.
The 12-month rate of change for the Value Line Arithmetic Index is also nearing levels where previous non-recession lows have formed.
Figure 7: Value Line Arithmetic Index 252-day Rate of Change.
At this point, if the model doesn’t generate a sell signal, then we will turn our attention toward our “mean-reversal” indicators to alert us to the likelihood that the secular uptrend is resuming following this cyclical downturn. For example, the indicator below, based on the percentage of Russell 3000 stocks above their 50-day moving averages, would generate a buy signal with a reversal back above the 40 level. This would represent a reignition in demand. At this point, the indicator is poised to reverse. Should it not, the indicator will remain on a sell signal.
Figure 8: Percentage of stocks above 50-day SMAs = 5.37%. So bad, it's good?
A series of breadth thrusts would also confirm the likelihood that the uptrend has moved back in gear.
Figure 9: Breadth thrust indicators often confirm the veracity of an uptrend.
To the surprise of no one, investor sentiment is at a level that denotes excessive pessimism.
Figure 10: CNN Fear and Greed Index registering Extreme Pessimism.
We do have concerns. For example, credit spreads have widened considerably, and in a very short period of time. As you can see on the chart below (and like many of the charts we’ve featured), current levels are consistent with non-recession lows. Again, it all boils down to whether a recession is likely, and at this point our indicators and models point to continued growth, albeit below trend. If tariffs do actually start to impact GDP trends negatively, our model is poised to capture that information and become risk-off. We would note that the widening of the spreads is partially a function of lower Treasury yields (obviously). Part of that, in our view, is liquidity-related, and frankly, the initial rebalancing of the portfolio from stocks to bonds usually sees the most liquid asset classes accessed first. However, we recognize that a flight-to-safety mindset is still correctly reflected in the indicator.
Figure 11: High-Yield Option-Adjusted Spreads have widened.
Lastly, we wouldn’t lose sight of the Fed’s ability to step in and stabilize markets. When and why they would do so is unclear, but the equity markets are pricing in two cuts or so over the next six months. Outside of a panic cut in the face of quickly deteriorating economic data, this would likely serve as another market stabilization event, buying time for additional tariff negotiations.
Figure 12: Two rate cuts are currently expected within the next six months.
In conclusion, the recent tariff announcements exemplified the worst-case scenarios anticipated by the market. While there are avenues for mitigation and potential trade deals on the horizon, the likelihood of further escalation remains a significant concern for both markets and economies globally. At this point, the market has digested quite a bit of bad news and uncertainty, yet we continue to think defensively at this juncture with the model on the cusp of a signal. Historically, the model has moved to sell signals when the market is down 10% to 15% and the economic/fixed income/technicals confirm. In other words, the model’s changes are within expectations (especially with Friday’s -5.97% decline resulting primarily from a “headline”). If the model generates a sell signal and we raise cash, we will then look to our mean reversion (oversold indicators), sentiment reversal, and short-term momentum factors to get us back in once the market stabilizes. In other words, we have short- and intermediate-term “buy” models focusing on technicals to get us back in.
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.
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.
Regulated Investment Company (RIC) - Can be any one of several investment entities. For example, it may take the form of a mutual fund or exchange-traded fund (ETF), a real estate investment trust (REIT), or a unit investment trust (UIT). Whichever form the RIC assumes, the structure must be deemed eligible by the Internal Revenue Service (IRS) to pass through taxes for capital gains, dividends, or interest earned to the individual investors.
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.
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.
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