Day Hagan Catastrophic Stop Update August 18, 2026
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Summary
The Day Hagan Catastrophic Stop Model held steady at 68.18%. Overall, the model continues to support benchmark-level equity exposure.
Figure 1: The model remains constructive. A decline below 40% for two consecutive days would generate a sell (raise cash/reduce risk) signal.
The Day Hagan Daily Market Sentiment Composite increased to 72.67, moving into excessive optimism. That is a caution flag, not an automatic sell signal. Strong sentiment can persist while prices climb, so the approach is to go with the flow until optimism reaches an extreme and then reverses. Supporting signs include a low VIX (14.25) and a 0.52 CBOE Equity put/call ratio, both consistent with complacency and aggressive call buying. However, AAII remains less exuberant, with only 34.7% bullish and 37.9% bearish. Taken together, participation remains mixed but increasing. Risk controls should tighten as enthusiasm increases and reversal risk rises.
Figure 2: Sentiment moved into Excessive Optimism territory. It is now a headwind.
Portfolio Outlook
Technology remains the market’s earnings engine, backed by strong revisions, attractive growth relative to valuation, and healthy long-term breadth. Financials also stand out, with broad participation and a reasonable P/E, although analysts see limited target-price upside.
Energy looks inexpensive and technically strong, but sharp projected earnings declines in 2027 argue against chasing it. Health Care combines improving future growth with solid breadth, making it worth watching.
The weak spots are Utilities and Real Estate, where short-term participation remains poor and valuations offer little room for disappointment. Investors should favor sectors where earnings, revisions, and price trends agree, while treating isolated strength with caution for now.
Figure 3: S&P 500 Sector Fundamentals and Technicals
Sources — Fundamentals: FactSet Earnings Insight, August 7, 2026 (growth, valuation, ratings and target-price data); Yardeni Research/LSEG Datastream (August 7 LTEG and July NERI). FactSet did not issue a Friday update on August 14.
Sources — Weights: State Street SPY index sector breakdown as of August 13, 2026. Technicals: Nasdaq ETF closes and Barchart/EODData S&P sector breadth series through August 14, 2026.
Methodology — PEG equals forward P/E divided by LTEG. RSI is the 21-day Wilder RSI on State Street sector ETFs (SPY for the benchmark). Breadth is the percentage of sector constituents above the stated moving average.
As-of note — Fundamental columns, including target-price upside, remain at August 7. Only sector weights and technical columns were rolled forward because no newer FactSet weekly package was published.
Methodology: PEG equals forward P/E divided by LTEG. RSI is the 21-day Wilder RSI on the official State Street sector ETFs (SPY for the benchmark). Moving-average breadth is the share of current S&P 500 constituents in each sector whose August 7 close exceeded its 50- or 200-day simple moving average. BF.B and three recent additions with fewer than 200 observations (FDXF, HONA and Q) were excluded from breadth calculations.
Sector Weekly Updates:
Consumer Discretionary: We remain underweight. Tapestry fell roughly 21% after results exposed continued weakness at Kate Spade, while Ulta Beauty declined nearly 10%. Those losses overwhelmed better trading in Tesla and Home Depot and reinforced concerns about soft retail sales, strained consumers, and demanding valuations.
Consumer Staples: We remain underweight. Tyson Foods rallied Friday as investors welcomed its restructuring plans, while Coca-Cola and Procter & Gamble provided modest support. Walmart, however, fell sharply during the week ahead of earnings. Leadership remains narrow, earnings momentum is limited, and several dependable franchises already carry premium valuations.
Communication Services: We remain underweight. Alphabet’s nearly 4% Tuesday decline did most of the early damage, while Netflix and Fox also weakened. Alphabet and Meta rebounded Thursday as AI enthusiasm returned, but the sector’s uneven week showed how heavily performance depends on a few large holdings.
Energy: We remain neutral. Marathon Petroleum and Valero surged approximately 20% and 15%, respectively, through Thursday as disruptions to global refined-product supplies widened refining margins. Chevron also benefited from higher oil prices. The strength was impressive, but concentrated in refiners, while weaker 2027 earnings expectations argue against becoming more aggressive.
Financials: We remain overweight. Apollo, KKR, Blackstone, and Brookfield rallied after joining Nvidia’s plan to mobilize more than $500 billion for AI infrastructure. Apollo received another lift from its Yankees financing agreement, while Berkshire Hathaway advanced following earnings. Asset managers, insurers, and banks continue to broaden the sector’s leadership.
Health Care: We remain neutral. Cardinal Health reached a record after issuing a stronger profit outlook, while Merck, CVS, Cigna, and UnitedHealth strengthened later in the week. Eli Lilly was less consistent. Improving participation is encouraging, but the split between drugmakers, distributors, and managed-care companies still argues for selectivity.
Industrials: We remain neutral. Caterpillar, Boeing, and Copart helped the sector advance, with Copart jumping 7% Friday. Honeywell was the notable drag, falling more than 5% Tuesday. Machinery, aerospace, defense, and infrastructure demand remain supportive, although elevated valuations leave less room for execution disappointments.
Information Technology: We remain overweight. Palo Alto Networks and CrowdStrike surged early, while Micron, SanDisk, Super Micro, and Nvidia powered the midweek rebound. Friday brought a reality check as Broadcom and Applied Materials fell approximately 6% and 5%. Earnings remain strong, but investors are demanding more from richly valued AI beneficiaries.
Materials: We remain underweight. Newmont and Freeport-McMoRan benefited from firm gold and copper prices, but weakness in packaging, chemicals, and coatings limited the sector. PPG, Packaging Corporation of America, and International Paper finished Friday lower. Commodity strength has not yet produced broad, dependable sector leadership.
Real Estate: We remain overweight. Digital Realty rose for three consecutive sessions, including a 1.3% Friday gain, as data-center demand remained a bright spot. Prologis, Alexandria Real Estate, and BXP were weaker Friday. The sector’s rate sensitivity remains a headwind, but data centers, logistics, and necessity-based properties offer better support.
Utilities: We remain neutral. Constellation Energy led the group, gaining more than 3% Tuesday and another 1.4% Friday as investors returned to AI-related power demand. NextEra was steadier, while Duke Energy and Exelon suffered sharp early-week declines before recovering. Improving electricity demand is attractive, but high Treasury yields remain stiff competition.
Figure 4: Sector Relative Strength vs. S&P 500
Breadth is healthy, but leadership remains uneven. Financials, Energy, Health Care, and Materials show strong participation above both moving averages, suggesting their advances are supported. Technology’s long-term breadth remains solid, although fewer stocks are above their 50-day average. Real Estate shows a sharper short-term breakdown despite strong 200-day breadth. Utilities are the weak spot, with only 19.4% above their 50-day average. Consumer Staples and Communication Services are improving, while Consumer Discretionary remains mixed, not convincingly strong.
Figure 5: Breadth OK.
Sector momentum is positive, but nothing looks dangerously overheated. Energy and Financials lead, with RSI readings near 68 and five-day averages confirming their strength. Health Care, Industrials, and Technology also remain comfortably above 50, supporting continued participation. Real Estate is mixed, as its daily RSI has improved while its smoothed reading remains below 50. Utilities are the clear laggard, with both measures negative. Consumer sectors, Communication Services, and Materials are positive, though their momentum is only moderate.
Figure 6: Sector RSIs.
Volatility-target equity exposure slightly increasing, but not at over-exuberant levels.
Figure 7: Vol-targeting funds’ exposure increased slightly.
Our proxy for managed futures and trend followers appears to be holding exposure relatively steady.
Figure 8: Positioning indicators remain mixed, but the overall message is still neutral.
Analysts are raising earnings forecasts at a strong pace. The S&P 500’s 12-month forward EPS is up 9.4% over the past 63 days, ranking in the 98th percentile historically. Technology leads with a 16.1% increase, while Health Care, Industrials, Consumer Discretionary, and Communication Services sit above the 90th percentile. The caution lies in Energy and Materials, where revisions have fallen from spring peaks. Utilities and Consumer Staples remain positive, but offer little earnings momentum.
Figure 9: Earnings continue to support equities.
Strategists’ year-end S&P 500 target of 7,845 sits 0.8% above the index, far below the 5.7% cushion. Forecasts have caught up with prices, leaving little upside and greater disappointment risk.
Figure 10: S&P 500 vs Year-End Strategist Forecasts.
Our cycle work indicates a chance for potential weakness into October, a low during the month, and a year-end rally. Think of this as a “backdrop.”
Figure 11: Updated S&P 500 cycle composite for 2026 and 2027.
U.S. Economic Releases:
Last week’s data pointed to cooler inflation but softer activity. Headline and core CPI eased to 3.4% and 2.5% year over year, while producer prices were flat and below expectations. However, consumer inflation expectations rose to 4.3%, keeping the outlook unsettled. Retail sales fell 0.6%, consumer sentiment weakened, hiring slowed, and claims increased. Small-business confidence improved, but housing activity remained subdued. Overall, growth appears to be losing momentum without inflation being fully defeated.
Figure 12: U.S. Inflation Trends.
This week there will be several measures of housing activity released. U.S. housing remains sluggish: existing home sales fell 1.7%, permits weakened, and mortgage rates hover near 6.7%. The slowdown restrains construction, furnishings, lending, and household mobility, subtracting momentum from broader overall economic growth.
Figure 13: A resurgence in housing would be very bullish. So far, the industry is still moribund.
Figure 14: Economic release calendar. Source: Forexfactory.com
Bottom Line: The market has support, but the margin for error is shrinking. The Catastrophic Stop Model remains constructive at 68.18%, while earnings revisions rank in the 98th percentile, led by Technology. However, sentiment has crossed into excessive optimism at 72.67, the VIX is 14.25, and strategists see 0.8% year-end upside. We remain overweight Technology, Financials, and Real Estate. Cooler inflation helps, but weaker retail sales, housing, hiring, and confidence argue for tighter risk controls.
For more details on each sector and current model levels, please visit our research page at https://dayhagan.com/research.
This strategy uses measures of price, valuation, economic trends, liquidity, and market sentiment to make objective, rational, and emotion-free decisions about how much capital to place at risk and where to allocate it.
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.
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
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Disclosures
Disclosure: The information contained herein is provided for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. The securities, instruments, or strategies described may not be suitable for all investors, and their value and income may fluctuate. Past performance is not indicative of future results, and there is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. Investing involves risks, including loss of principal.
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S&P 500 Index—An unmanaged composite of 500 large-cap companies, 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. Professional investors widely use this index as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Russell 3000: The Russell 3000 Index measures the performance of approximately 3,000 of the largest U.S. publicly traded companies, representing about 98% of the investable U.S. equity market.
AAII Sentiment Survey — A weekly survey measuring whether individual investors expect stocks to rise, fall, or remain unchanged over the next six months.
Backwardation — A futures-market structure in which near-term commodity prices exceed longer-dated prices, often indicating tight current supplies.
Benchmark Equity Allocation — The normal percentage of a portfolio assigned to stocks based on its investment objective and risk profile.
Breadth — The degree to which market gains or losses are shared across individual stocks. Broad participation generally strengthens a market trend.
Bull-Bear Spread — The percentage of bullish investors minus the percentage of bearish investors.
Catastrophic Stop Model — Day Hagan’s risk-management model designed to identify periods when major market deterioration may warrant reducing equity exposure.
CDS, or Credit Default Swap — A market-based measure of the perceived risk that a borrower will default. Rising CDS costs generally indicate increasing credit concern.
Contrarian Buy Signal — A signal suggesting widespread pessimism may have become excessive, potentially creating a buying opportunity.
Contrarian Sell Signal — A warning that optimism, risk-taking, or positioning may have become excessive, increasing vulnerability to disappointment.
Daily Market Sentiment Composite — Day Hagan’s 0–100 measure combining multiple indicators of investor psychology. Readings below 30 indicate excessive pessimism, while readings above 70 indicate excessive optimism.
DBMF — The iMGP DBi Managed Futures Strategy ETF, used here as a proxy for positioning among systematic, trend-following strategies.
Drawdown — The percentage decline from an investment’s previous peak to its subsequent low.
Earnings Revisions — Changes analysts make to company profit estimates. Rising estimates are generally supportive of stock prices.
Federal Funds Rate — The Federal Reserve’s primary short-term policy interest rate.
FOMC — The Federal Open Market Committee, the Federal Reserve group responsible for setting monetary policy and interest rates.
Forward Earnings — Analysts’ estimates of company profits over a future period, commonly the next 12 months.
Forward Earnings Growth Rate — The expected percentage increase in future corporate earnings compared with the prior comparable period.
Forward P/E Ratio — A stock’s price divided by expected earnings over the next 12 months. Higher readings generally indicate more demanding valuations.
Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
Maximum Drawdown — The largest peak-to-trough decline experienced during a specified period.
OAS, or Option-Adjusted Spread — The additional yield a bond provides over a comparable Treasury after adjusting for embedded options. Wider spreads generally indicate greater perceived credit risk.
Overbought — A condition in which prices have risen rapidly and may be vulnerable to a pause or pullback.
Oversold — A condition in which prices have fallen rapidly and may be positioned for a rebound.
PEG Ratio — The price-to-earnings ratio divided by expected long-term earnings growth. A lower ratio may indicate a more attractive valuation relative to anticipated growth.
Risk-Off Signal — An indication that market conditions have deteriorated enough to favor reducing exposure to riskier assets.
RSI, or Relative Strength Index — A momentum indicator ranging from 0 to 100. Readings above 70 commonly indicate overbought conditions, while readings below 30 indicate oversold conditions.
Systematic Investors — Strategies that adjust exposure using predefined rules based on trends, volatility, momentum, or other quantitative signals.
VIX — A market-based measure of expected S&P 500 volatility over the next 30 days, sometimes called the market’s fear gauge.
Volatility-Targeting Strategy — A rules-based strategy that generally reduces equity exposure when volatility rises and increases exposure when volatility falls.
WTI — West Texas Intermediate, a major U.S. crude-oil pricing benchmark.
WTI Forward Curve — The series of prices for WTI crude-oil futures across different expiration dates, reflecting supply, demand, storage, and market expectations.
Communication Services sector: The Communication Services Sector includes telecom and media & entertainment companies, including producers of interactive gaming products and companies engaged in content and information creation or distribution through proprietary platforms.
Consumer Discretionary sector: The Consumer Discretionary sector's manufacturing segment includes automobiles & components, household durable goods, leisure products, and textiles & apparel. The services segment includes hotels, restaurants, and other leisure facilities. It also includes distributors and retailers of consumer discretionary products.
Consumer Staples sector: The Consumer Staples sector includes manufacturers and distributors of food, beverages, and tobacco, as well as producers of non-durable household goods and personal products. It also includes distributors and retailers of consumer staples, including food & drug retailers.
Energy sector: The Energy sector includes companies that operate in exploration & production, refining & marketing, and storage & transportation of oil & gas, as well as coal & consumable fuels. It also includes companies that offer oil & gas equipment and services.
Financials sector: The Financials sector encompasses banking, financial services, consumer finance, capital markets, and insurance. It also includes Financial Exchanges & Data and Mortgage REITs.
Fixed Income sector: The Fixed Income sector includes investment securities that pay investors fixed interest payments until maturity. Designed for income generation and capital preservation, this sector includes government, corporate, and municipal bonds, as well as certificates of deposit (CDs).
Health Care sector: The Health Care sector includes health care providers & services, health care equipment & supplies, and health care technology companies. It also includes companies involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.
Industrials sector: The Industrials sector includes aerospace & defense, building products, electrical equipment, machinery, and companies that offer construction & engineering services. It also includes providers of commercial & professional services, including printing, environmental & facilities services, office services & supplies, security & alarm services, human resources & employment services, and research & consulting services. It also includes companies that provide transportation services.
Information Technology sector: The Information Technology sector includes software and information technology services, manufacturers and distributors of technology hardware & equipment, such as communications equipment, cellular phones, computers & peripherals, electronic equipment and related instruments, and semiconductors and related equipment & materials.
Materials sector: The Materials sector includes chemicals, construction materials, forest products, glass, paper and related packaging products, and metals, minerals, and mining companies, including steel producers.
Real Estate sector: The Real Estate sector includes companies engaged in real estate development and operation. It also includes companies offering real estate-related services and Equity Real Estate Investment Trusts (REITs).
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