Day Hagan Catastrophic Stop Update August 12, 2025
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The DH Catastrophic Stop model declined to 59.09% from 72.7% last week. The model indicates that investors should maintain their benchmark equity exposure.
The model's shift toward neutral levels allows it to potentially trigger a sell signal more rapidly if conditions warrant.
Figure 1: DH Catastrophic Stop Model.
Last week's update noted a slight decline in the model, driven by the Breadth Thrust Composite shifting to neutral as its bullish signal faded, consistent with historical trends. Similarly, this week, the Oversold Mean Reversion Composite's buy signal from April 8 expired, also moving to neutral.
To clarify, neither indicator has turned bearish. Both the Breadth Thrust and Oversold Mean Reversion Composites are now neutral, reflecting our research that their bullish signals typically weaken over time. These indicators are designed to pinpoint significant market lows, with this tapering effect built into their framework.
Figure 2: The Breadth Thrust and Oversold Mean Reversion Composites are both rated neutral as their maximum bullish impact periods have expired.
The Day Hagan Daily Market Sentiment Composite has issued a sell signal, reflecting a shift in investor sentiment from excessive optimism to neutral. Historically, this transition acts as a headwind for equities until excessive optimism subsides, typically indicated by a drop below 30 into the excessive pessimism zone.
Figure 3: Investor sentiment is being reset as illustrated by the DH Daily Market Sentiment Composite declining below 70.
Longer-term trend indicators generally remain on buy signals.
Figure 4: The 40-day/200-day MACD has been effective at positioning on the right side of major trends.
Volume-adjusted Demand continues to outpace Supply. This is constructive in the long term.
Figure 5: Equity demand is still rated as bullish.
High-Yield Option-adjusted spreads are relatively low. Historically, this has been equity market positive.
Figure 6: If credit spreads start to widen, it will be a caution sign. Currently, the indicator remains bullish. A move above the zero threshold would be concerning.
Positioning indicators remain mixed, but the overall message is that gross and net leverage levels have moved lower. GS Prime notes, “Overall book gross leverage fell 2 pts to 78.8 % (44th percentile, 1-year), and net leverage declined 1.4 pts to 75.9 % (36th percentile, 1-year). It’s on the lower side of the typical range."
They also write, “Hedge funds net sold U.S. Info Tech stocks for the third straight week — and at the fastest pace in over four months — driven by both short and long sales (3.9 to 1). All subsectors were net sold, led by Tech Hardware, Software, and Semis & Semi Equip. Info Tech now accounts for 19.2% / 16.4% of total U.S. Gross / Net Exposure on the Prime book, ranking in the 71st / 11th percentiles versus the past five years.” To reiterate, net exposure to the Information Technology sector is at the 11th percentile based on a 5-year lookback. (source: GS via MarketEar)
Figure 7: Institutional investors have reduced equity exposure and are less leveraged than one might think, with the S&P 500 near ATHs.
As always, we keep track of earnings trends. Q2 Y/Y earnings growth forecasts have increased from 4.9% on June 30 to 11.8% as of 8/8/2025. Q3 Y/Y earnings growth expectations are 7.2%, unchanged from the June 30 reading.
Figure 8: Earnings growth expectations continue to rise. Bullish.
We continue to view U.S. economic activity as positive but below trend. In support of this view, the Atlanta Fed GDPNow real GDP estimate for Q3 is now 2.5% (annualized).
Figure 9: Economic growth is OK. Lower rates will be stimulative. We’re likely to see more “Don’t Fight the Fed” banners.
Interestingly, FactSet notes that “Overall, the term ‘recession’ was cited on 16 earnings calls conducted by S&P 500 companies during this period. This number is well below the 5-year average of 74 and the 10-year average of 61. In fact, this number reflects a quarter-over-quarter decline of 87% compared to Q1 2025, when the term ‘recession’ was cited on 124 earnings calls (March 15 through June 14).”
Figure 10: Far fewer companies are citing “recession” during their Q2 earnings calls than during Q1. It's interesting how hopes for rate cuts can change a narrative.
The CPI report released this morning supports our belief that inflation is moving in the right direction; however, the rate of decrease has leveled off. With rising inventories in homes, cars, appliances, and the potential increase in oil supply (possibly from Russia), we still consider inflation trends to be a secondary concern, even amid ongoing tariff uncertainties.
Figure 11: Food away from home, fuel oil, used car and truck prices, shelter, transportation services, and medical care services increases don’t jibe with what I’m seeing in Sarasota, Florida. For example, housing inventories and car/truck inventories are building (and dealers are offering significant incentives).
Given the considerable attention paid to the CPI report today, the NFIB report may not be receiving sufficient attention. We consider it to be one of the most important pieces of information available, as it has historically done a good job of defining business trends in the U.S.
NFIB notes: “The Small Business Optimism Index rose 1.7 points in July to 100.3, slightly above the 52-year average of 98. Of the 10 Optimism Index components, six increased, two decreased, and two were unchanged. The increase in those reporting better business conditions and that it is a good time to expand contributed most to the rise in the Index. While the Optimism Index news is positive, the Uncertainty Index news is less so. The latter increased by 8 points from June to 97, signaling a significant worsening of small business uncertainty.”
Small businesses 1) expect the economy to improve, 2) view now as a good time to expand, 3) think current inventories are too low (as of July), and 4) plan to increase inventories. The major detractor is the “Uncertainty Index” (the sum of all don’t know and uncertain answers received). As uncertainty diminishes, the index is likely to improve further.
Figure 12: The results of the NFIB Small Business survey are encouraging.
Upcoming Reports We’ll be Watching Closely
The CPI is out, and the markets seem to have liked the message. PPI and Unemployment claims on Thursday. Retail Sales on Friday, as well as a look at the TIC report (providing clues as to foreign demand for U.S. assets).
Lastly, based on the NFIB responses presented above, we’ll be going through the inventory data pretty closely (Friday).
Figure 13: Calendar of Economic Releases
Conclusion
Our view is unchanged from last week: Excessive optimism and short-term overbought conditions persist but have moderated somewhat. So far, the markets have looked past the potential headwinds. We expect a period of consolidation, which could take the form of a sideways market or a minor pullback, both of which we would consider healthy for the longer-term uptrend. Our longer-term indicators remain constructive.
For more details on each sector and current model levels, please visit our research page at https://dayhagan.com/research
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, rational, and unemotional decisions about how much capital to place at risk and where to allocate that capital.
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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.) Data sources: Day Hagan Asset Management, 3Fourteen Research, J.P. Morgan, Goldman Sachs, Barchart, StreetStats, Atlanta Fed, St. Louis Fed, Koyfin, Yardeni, S&P Global, SPDR, FactSet.
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.
Breadth Thrust – A technical indicator which determines market momentum, signaling the start of a potential new bull market.
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.
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.
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.
NFIB – The National Federation of Independent Business advocates on behalf of America’s small and independent business owners.
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.
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