Day Hagan Catastrophic Stop Update August 13, 2024
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Catastrophic Stop Update
The Catastrophic Stop model declined slightly to 53.6% from 60.7% last week. The Internal and External composites are neutral.
Figure 1: The Catastrophic Stop model is neutral. A decline below 40% for two consecutive days would generate a sell signal. Currently, it continues to recommend a fully invested position.
The model’s decline was due to the U.S. Stock/Bond Relative Strength Factor reversing to a sell signal. The previous Buy signal had been in place since November 17, 2023.
Figure 2: When bonds evidence relative strength, it has historically been a good indication that the demand for equities is transitioning to a more risk-off posture.
The good news is that the volatility since the July 16th top has reversed sentiment from excessively optimistic levels back into the extreme pessimism zone, which has historically been supportive in the near term. Note that the recent low was below the levels seen in October 2023 and after the April 2024 decline.
Figure 3: Short-term sentiment measures indicate the market has worked off some of the froth.
In last week’s Update, we highlighted several indicators describing the oversold condition of the market. As you can see in the charts below, the short-term oversold conditions are still active.
Figure 4: TRIN indicators (comparing upside volume to downside volume over various time frames) showed that the selling has been significant enough to set these up for buy signals. We require a reversal back through the upper band to signal that selling is decelerating and/or reversing. The shortest-term measure, the 10-day TRIN, has reversed to a buy signal. The 20- and 40-day have not yet confirmed but are heading in the right direction.
Figure 5: Longer-term measures of oversold are still neutral. For example, the McClellan Summation Index provides long-term buy signals when the oscillator falls below -3450 (or indicates a breadth thrust with a move above 0). It hasn’t triggered either signal since the October 12, 2022, bottom. We use several similar indicators to identify major lows. So far, none have declined enough to do so.
The PPI report was released this morning, and came in below expectations, up 0.1% m/m, versus expectations of 0.2%, following a 0.2% increase last month. This confirms the “Moderate Disinflation” message of the Inflation Timing Model.
Figure 6: The latest PPI (Producer Price Inflation) report is consistent with a moderate disinflation stance. The chart below illustrates that equities tend to appreciate when the PPI y/y change is between -0.28% and +4.47%.
The CPI report will be on Wednesday. The consensus is for a 0.2% m/m gain for the headline CPI and Core CPI. If indeed that’s the case, it would be an increase from last month’s results. However, the y/y is expected to be 3%, the same as last month.
Figure 7: Looking at Core CPI and some of the components influencing the result, you can see that the Core CPI (less food and energy), commodities (less food and energy), and services (less food and energy), have all been moving lower (disinflationary).
The retail sales report may be the most important of the three for this week. There has been quite a bit of discussion around the growing problems the lower-income consumer is facing. From spiking credit card balances (folks are resorting to credit cards to pay bills) to increasing delinquency rates to weaker housing stats. There are definitely some potential problems on the horizon we’re monitoring closely. The Fed has also expressed some concern around lower-income consumer trends.
Figure 8: Several measures of lower-end consumer health are deteriorating. (Home Depot’s earnings report was another indication that consumers are delaying purchases due to economic uncertainty.)
Figure 9: The U.S. Economic Surprise Index shows that economic releases over the past three months have been coming in below expectations. A move above 0 would indicate that economic reports are once again beating expectations and that analyst expectations have been recalibrated. When this occurs, along with short-term oversold conditions in place, we would expect a resumption of the uptrend.
Bottom Line: We are monitoring economic growth closely, as that is the driving force behind the recent decline (among myriad other factors). The quantitative, unemotional outlook confirms that economic growth is decelerating but still positive overall. Inflation pressures continue to diminish. The situation is fluid, to say the least. As our indicators shift, we will adjust the portfolio accordingly, up or down. Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. Currently, the uptrend remains intact. As has been the case for all of 2024, the broader-based composite models calling U.S. economic growth, international economic growth, inflation trends, liquidity, and equity demand remain constructive. The Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will raise cash.
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
Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. Charts courtesy Ned Davis Research (NDR). © Copyright 2024 NDR, Inc. Further distribution is prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
Disclosures
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.
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.
McClellan Summation Index – A popular technical analysis took for visualizing and understanding market breadth. It helps identify overall market direction and momentum.
TRIN - is a technical analysis indicator that compares the number of advancing and declining stocks (AD Ratio) to advancing and declining volume (AD volume). It's used to gauge overall market sentiment.
Dow Jones Industrial Average – Is the aggregate dividend yield on the 30 stocks that make up the Dow Jones Industrial Average. The DJIA is one of the most widely watched market ideas in the financial markets and is considered a bellwether of the U.S. economy.
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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