Day Hagan Catastrophic Stop Update August 18, 2025
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The DH Catastrophic Stop model declined to 50.0% from 59.09% last week. The model indicates that investors should maintain their benchmark equity exposure.
The model's continued 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: Stock/Bond relative strength indicates equity momentum may be rolling over.
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, which signals the transition into excessive pessimism.
Positioning data shows: 1) Volatility control funds near full allocations (DB), 2) Discretionary investors at 51% (DB), and 3) Systematic investors at 89% (DB). In other words, equity exposure has increased and is no longer likely to provide a significant tailwind at these levels.
Figure 3: Investor sentiment is being reset as illustrated by the DH Daily Market Sentiment Composite declining below 70.
Our longer-term trend-following indicators remain generally positive, though not as broad-based as last week.
Figure 4: Longer-term trend indicators continue to rate the uptrend as intact.
Overbought conditions remain in place, but current levels are below historical extremes.
Figure 5: RSI levels consistent with modestly overbought conditions.
Seasonality is expected to be a headwind into early October.
Figure 6: S&P 500 Cycle Composite based on an average of the 1-year, 4-year, and decennial cycles (trend is more important than levels).
The range of the expected move for the SPX into the 9-19-2025 expiration, based on option pricing (see previous updates), is between 6,598 and 6,282, or a range of +/-2.45%.
Figure 7: Option pricing and declining volatility backdrop illustrate growing investor complacency.
Currently, the SPX is in a positive gamma state, meaning muted volatility. Based on the current options structure, the SPX would flip to a negative gamma state (high volatility) below 6,388, just below the Put Wall at 6,400.
Interestingly, based on the VIX volatility term structure, investors are pricing implied volatility to increase from 9.91 to 15.35 by year-end.
Figure 8: Gamma exposure by strike. A decline below 6,388 (or similar levels, depending on the options structure at the time) might cause a volatility spike. We’re monitoring this closely.
Now that Q2 earnings season is largely over, we’ll be watching earnings revision trends for signs that earnings are likely to continue outperforming expectations into the second half of the year.
As shown in the chart below, revisions have been overwhelmingly positive.
Note: For Q2, about 75% of the S&P 500 have reported results that have far exceeded expectations. Another 3% report this week, 9% next week, and 3% the week after. Home Depot, Lowe's, Target, TJX, WMT, ZM, and WSM will be particularly interesting this week, given the focus on the consumer.
Figure 9: Earnings revisions are constructive. The trend is your friend.
The U.S. Economic Surprise Index illustrates that economic releases have been better than expected, on average, over the last three months.
Other countries/regions supported by positive Economic Surprise Index levels include the Eurozone, Japan, the U.K. (which has just turned positive), Canada, Switzerland, and Emerging Markets.
Negative ESI = China (recently turned negative), Latin America, Sweden, and Australia.
Figure 10: Economic reports for the U.S. have generally been better than expected. Constructive so far, but last week’s PPI, Industrial Production, and retail sales results underwhelmed.
Jackson Hole is scheduled for Thursday and Friday (Powell speaks at 10:00 EST on Friday), but we will hear from Bowman tomorrow, followed by Waller and Bostic on Wednesday. Keep in mind that Waller and Bowman were the dissenting votes at the July 29-30 meeting. We’re curious if they are being trotted out to “soften” any hawkish rhetoric from the Chairman. Stay tuned.
The bottom line is that the Fed is expected to ease this year, which is a positive underpinning.
Figure 11: Fed funds rate expected to drop below 4% by November and head lower to 3.11% by August 2027.
The recent pullback in the U.S. dollar index (since August 1) is telling us that Fed cuts are being priced in. The good news is that a weaker U.S. dollar has historically supported earnings of the S&P 500 index.
Figure 12: A weaker U.S. dollar is positive for earnings.
Upcoming Reports We’ll be Watching Closely
As mentioned earlier, economic data over the past three months has generally outperformed expectations; however, recent releases, outside of the NFIB (discussed last week), have been underwhelming.
Keep an eye on Initial Unemployment Claims.
The main focus, of course, will be on Powell. The market is pricing in a cut at the next meeting (September 16-17). If he says anything that seems to contradict that view, we expect a negative market response.
Figure 13: Calendar of Economic Releases
Conclusion
Our perspective has not changed significantly over the past few weeks. The excessive optimism we observed three weeks ago has moderated, but it continues to decline. Historically, when sentiment and technical indicators are reversing from peaks, it is advisable to follow the trend. We will monitor sentiment and short-term technical indicators, such as overbought and oversold levels, as well as trend deviations, to identify a trough and a potential reversal before issuing new buy signals. We expect a consolidation phase as our indicators move directionally toward more normalized levels. This consolidation phase may appear as a sideways market or a minor pullback, both of which would support the long-term uptrend. Our long-term indicators remain positive overall, reinforcing a constructive outlook for the market in the long term.
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.
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.
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 time that is convenient for you.
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.
Relative Strength Index (RSI) - Is an oscillating indicator that is designed to measure a stock's momentum, which is both the speed and size of price changes. Many investors use this indicator to help identify whether a stock is overbought or oversold.
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.
NFIB – The National Federation of Independent Business advocates on behalf of America’s small and independent business owners.
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.
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