Day Hagan Catastrophic Stop Update August 25, 2025
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The DH Catastrophic Stop model level is 50.0%, unchanged from last week. The model indicates that investors should maintain their benchmark equity exposure.
Our perspective also remains largely unchanged from last week. The excessive optimism noted three weeks ago has moderated, and we anticipate a consolidation phase as sentiment and technical indicators trend toward more normalized levels. We will closely monitor overbought and oversold conditions to identify potential reversals before issuing new buy signals. Although a sideways market or minor pullback may occur, long-term indicators continue to support a positive outlook for the market.
Figure 1: DH Catastrophic Stop Model. The model's neutral level allows it to potentially trigger a sell signal more rapidly if conditions warrant.
The Day Hagan Daily Market Sentiment Composite remains on a sell signal, reflecting a shift in investor sentiment from excessive optimism to a neutral stance. Historically, this transition acts as a headwind for equities until excessive optimism subsides, typically indicated by a drop below the 30 threshold, which signals the transition into excessive pessimism.
Figure 2: Investor sentiment is being reset as illustrated by the DH Daily Market Sentiment Composite declining below 70.
3Fourteen Research shows that trend followers (based on the DBMF proxy below) equity exposure is toward the high end of the 2.5-year range.
Other positioning data shows: 1) Risk Parity funds nearing fully invested levels (91%), 2) CTA’s nearing fully invested levels (94%), and 3) Consolidated Equity positioning at high neutral levels (65%). In other words, equity exposure is elevated and likely needs a cooling-off period.
Figure 3: DBMF’s calculated exposure indicates that trend followers are reaching fully invested levels. This coincides with the recent overly optimistic readings from our Sentiment Composite.
Volatility targeting strategies are also more fully invested. Interesting fact, 3Fourteen notes that “There have only been two years over the past 50 when the S&P 500 has made a new all-time high in September. However, one of those was last year (1996 and 2024).”
Figure 4: Systematic investors are at the high end of the 7-year equity exposure range.
Based on the equity exposure levels we previously discussed, we wanted to analyze potential hedging activity to provide further confirmation of our perspective. The chart below indicates that the current hedging activity is best characterized as neutral, which is a positive sign. Historically, high levels of hedging have been beneficial for equities over time. The chart below includes hedging measures for the S&P 500, NASDAQ 100, and DJIA.
Figure 5: Hedging activity is viewed as neutral. We would be much more concerned if hedging levels were low. Sentimentrader writes, “This chart reflects positions of hedgers and small speculators in the S&P 500, Nasdaq 100 and DJIA futures. It combines the full contract and e-mini, adjusting for contract size, and calculates the dollar value. The chart as shown is a one-year stochastic of hedger positions minus speculator positions, so if it reads 100, then hedgers are the most exposed to stocks in at least a year, and speculators are the least exposed. This is computed as a non-contrary indicator, so when the Combo is extremely high (an indicator reading above 80), it can be a good sign for stocks. Conversely, readings below 20 are usually a negative sign for stocks.”
A similar view of hedging is gleaned from the S&P 500-only calculations.
Figure 6: S&P 500 hedging is neutral.
Given the Russell 2000’s massive spike on Friday, the chart below illustrates that high levels of hedging were in place prior to the surge.
Figure 7: Small-cap stocks were very hedged heading into last Friday.
We’re keeping an eye on the SPX 6,378 level, as that is where the SPX Gamma condition would flip to negative, potentially exacerbating a downside move.
Figure 8: Below 6,378, volatility would likely increase. (Note: This figure changes daily.)
Turning to fundamentals, S&P 500 earnings revisions continue to trend positively (13-week view).
Figure 9: S&P 500 earnings revision breadth = (Upward Revisions – Downward Revisions) / Total Revisions. Constructive.
Turning to economic activity, last week, the S&P Global U.S. Flash PMIs came in better than expected. The levels were consistent with a 2.5% annualized real GDP growth rate.
Moreover, the U.S. Economic Surprise Index increased to 15.1, illustrating that economic releases continue to beat expectations on average.
Figure 10: PMIs provide a monthly look at the manufacturing and services sectors of the economy. Both are in expansion modes (above 50).
Markets are expecting a couple of rate cuts before year end. For perspective, when the Fed has cut rates when the Core CPI was above 3% and rising, the stock market generally moved higher, on average, over the next three months. (Since 1990, only 12 of 55 rate cuts have occurred under these conditions.)
Figure 11: Concerns around the Fed cutting into rising inflation may be overly pessimistic. (Source: 3Fourteen Research)
Upcoming Reports We’ll Be Watching Closely
Unemployment claims on Thursday (if the number is around the expected 230k, September rate hikes odds likely go up), Preliminary GDP on Thursday (the second of three looks), and Core PCE and Personal Spending/Income on Friday.
Of course, the NVDA earnings report on Wednesday will be important.
Figure 12: Upcoming U.S. economic releases.
Conclusion
Our perspective remains largely unchanged from last week. The excessive optimism noted three weeks ago has moderated, and we anticipate a consolidation phase as sentiment and technical indicators trend toward more normalized levels. We will closely monitor overbought and oversold conditions to identify potential reversals before issuing new buy signals. Although a sideways market or minor pullback may occur, long-term indicators continue to support a positive outlook for the market. Earnings trends, economic activity, central bank policy, monetary and fiscal policy remain supportive.
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.
Dow Jones Industrial Average (DJIA) – 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.
NASDAQ 100 Index – Is an index that aggregates the largest 100 nonfinancial companies listed on the Nasdaq exchange, spanning a wide array of industries like technology, healthcare, and consumer staples. While it excludes financial sector companies, it offers a diverse representation of the market’s most dynamically traded entities.
Russell 2000 Index – An index comprised of the 2,000 smallest companies on the Russell 3000 list and offers investors access to small-cap companies. It is a widely recognized indicator of small capitalization company performance.
Gamma – Is an options risk metric that represents the sensitivity of an option’s delta to movements in the underlying asset, indicating how much delta will change when the underlying price shifts by one point. Therefore, gamma is a measure of how the rate of change of an option’s price will change with fluctuations in the underlying price. The higher the gamma, the more volatile the price of the option is.
Purchasing Manager Indexes (PMI) – Purchasing Managers’ Index is a survey-based economic indicator designed to provide a timely insight into business conditions.
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There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
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