Day Hagan Catastrophic Stop Update August 25, 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.
Day Hagan’s Sentiment Composite finished Friday at 72.0, moving just above the 70 excessive-optimism threshold. Other measures are less euphoric. AAII bulls were only 35.5%, versus 39.9% bears, while the VIX closed at a subdued 15.13 and the Cboe equity put/call ratio was 0.51, signaling aggressive call demand. Bank of America’s survey also showed cash at 3.5% and equity allocations at a five-year high. Momentum remains favorable, but sentiment now warrants closer risk monitoring.
Figure 2: Sentiment moved into Excessive Optimism territory.
Portfolio Outlook
The Fundamentals and Technicals Table (below) supports maintaining a selective, growth-oriented posture. Technology remains the strongest fundamental engine, with 54% earnings growth, a 0.51 PEG and 28% target-price upside, while Financials offer reasonable valuation and breadth. Energy and Health Care provide diversification as momentum improves. However, expensive Discretionary, weak Utilities breadth and uneven 2027 estimates argue against broad risk-taking. We favor companies with visible earnings, positive revisions and strong balance sheets while keeping sector exposure disciplined.
Figure 3: S&P 500 Sector Fundamentals and Technicals
Sources — Method note: Forward P/E is the August 14 value adjusted by each sector ETF's August 14–21 price ratio; target-price upside is adjusted inversely, assuming the underlying analyst target is unchanged. PEG recalculates from updated P/E and the supplied long-term growth estimate.
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 21. 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 14 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:
For the week ended August 21, the S&P 500 declined 1.4% (price return, source Caliban). Health Care, Energy, and Materials advanced, while Technology, Utilities, and Industrials were the weakest sectors.
Consumer Discretionary: The sector slipped 0.2% despite Target gaining roughly 7% after comparable sales rose 3.8% and management raised its outlook. Tesla also strengthened, while TJX, Amazon, Booking, and Lowe’s declined. TJX’s weak Marmaxx performance and elevated fuel and borrowing costs reinforced concerns about uneven consumer demand.
Consumer Staples: Walmart fell approximately 10% after U.S. comparable-sales growth slowed to 2.6%, overshadowing its higher annual outlook. Coca-Cola, Kroger, PepsiCo, and Mondelez provided support, leaving the sector nearly flat. The divergence suggests consumers remain value-conscious, while premium valuations continue to limit the sector’s appeal.
Communication Services: The sector declined 1.4%, led by Meta’s nearly 7% retreat as investors reduced exposure to capital-intensive AI spending. Take-Two and Charter Communications also weakened. Comcast, Verizon, AT&T, Netflix, and Disney gained, but their strength was insufficient to offset Meta and the continued pressure from higher long-term financing costs.
Energy: The sector gained 2.5% as oil advanced approximately 5.6% amid renewed U.S.–Iran tensions and uncertainty surrounding the Strait of Hormuz. EOG Resources, ConocoPhillips, Occidental, Exxon, and Chevron rallied. Pipeline operators Williams and Kinder Morgan weakened, however, while oil-services stocks lagged, showing that leadership remained concentrated in producers.
Financials: The sector declined 1.2% as Treasury-market volatility pressured banks and alternative asset managers. Wells Fargo, Bank of America, JPMorgan, Apollo, and KKR weakened, while Visa, Mastercard, and selected capital-markets companies held up better. Stronger earnings and loan activity remain supportive, but higher funding costs and bond-market instability warrant caution.
Health Care: Health Care gained 4.3%, making it the week’s strongest sector. Encouraging cancer-vaccine trial results sent Moderna dramatically higher and lifted partner Merck roughly 12%. Eli Lilly, AbbVie, Amgen, and Thermo Fisher also rallied. UnitedHealth and Intuitive Surgical lagged, suggesting the improvement favored biotechnology and pharmaceuticals more than managed care.
Industrials: The sector fell 3.4%, with aerospace and defense stocks down approximately 8%. GE Vernova, Honeywell, Boeing, Lockheed Martin, and Eaton were notable laggards. Deere gained more than 6% after raising its profit outlook as construction sales increased 18%, while Union Pacific also advanced. Execution and valuation risks remain company-specific.
Information Technology: Technology declined 3.2% as investors reduced crowded semiconductor and AI-infrastructure positions. Nvidia, Broadcom, AMD, CrowdStrike, and Palo Alto Networks fell, while Salesforce, ServiceNow, Palantir, and Apple gained. The correction appears driven more by positioning, higher yields, and demanding expectations than a clear deterioration in AI demand.
Materials: Materials gained 2.3% as gold, silver, and copper strengthened. Freeport-McMoRan surged approximately 15% and Newmont gained nearly 12%, while Dow also advanced. Nucor, DuPont, and Sherwin-Williams declined, however. Commodity leadership remains powerful but narrow and has not yet produced consistently broad improvement across chemicals, packaging, and steel.
Real Estate: The sector declined 0.5% as the 10-year Treasury yield finished near 4.73% and the 30-year near 5.27%. Welltower, VICI Properties, and Prologis gained modestly, while Digital Realty and Equinix weakened alongside technology. Higher yields remain a headwind, but data centers, logistics, and necessity-based properties are still in demand.
Utilities: Utilities fell approximately 3.6% as higher Treasury yields reduced the appeal of dividend income and pressured capital-intensive companies. Vistra declined about 8%, while PPL, Exelon, Southern Company, and Constellation Energy also weakened. Electricity demand remains attractive, but elevated financing costs and renewed selling in AI-power beneficiaries seemed to limit near-term conviction.
Figure 4: Sector Relative Strength vs. S&P 500
Breadth remains constructive, but leadership is uneven. Energy and Health Care show the healthiest participation, with more than 80% of constituents above both moving averages, while Financials retain long-term breadth. Technology and Real Estate remain supported by their 200-day trends, although weaker 50-day readings signal near-term consolidation. Utilities have deteriorated, and Industrials and Discretionary remain mixed. The message is to stay invested, favor sectors with broad confirmation, and avoid chasing indexes whose gains depend on fewer stocks.
Figure 5: Breadth remains supportive, overall.
Sector momentum is constructive, but increasingly differentiated. Energy’s RSI has reached 71.8, signaling leadership but also an overbought condition that could invite consolidation. Health Care and Materials are strengthening, while Financials and Real Estate remain positive. Technology is mixed near the 50 dividing line, and Utilities and Industrials show the weakest momentum. The investment implication is to maintain exposure to confirmed leaders, avoid chasing Energy after its surge, and require improving momentum before adding to lagging sectors.
Figure 6: Sector RSIs.
Keeping an eye on the positioning levels for vol-targeting, systematic, and algo-driven segments of the market. While increasing, most aren’t at overly-exuberant levels.
Figure 7: Vol-targeting funds’ exposure increased.
Our proxy for managed futures and trend followers indicates increasing exposure to the S&P 500.
Figure 8: Positioning indicators remain mixed, but the overall message is still relatively neutral.
Earnings revisions remain exceptionally supportive, with S&P 500 forward estimates up 8.8% over the past 63 days, a 97th-percentile reading. Technology leads at 14.7%, while Health Care, Industrials, Consumer Discretionary and Communication Services also sit above the 90th percentile. Financials and Real Estate remain elevated, but Energy, Utilities, Materials and Staples show weaker or fading revisions. The investment implication is to favor sectors with persistent estimate increases, while recognizing that unusually optimistic expectations raise the penalty for earnings disappointments.
Figure 9: Earnings continue to support equities.
The pullback in the three-month rate of change (shown below) is worth monitoring, but it is not yet a warning signal. Forward EPS continues to reach highs near $391, year-over-year growth is 34.9%, and the three-month growth change remains positive at 5.3 percentage points. The decline indicates that earnings acceleration is cooling from an unusually strong pace. We will become more concerned if the measure turns negative alongside falling forward estimates and analyst downgrades. For now, earnings remain supportive.
Figure 10: The growth of the growth is slowing, but absolute earnings growth is still bullish.
The S&P 500 sits only 3% below strategists’ 7,901 year-end target, considerably less than the historical 5.7% forecast cushion. Consensus targets are not technical resistance because strategists revise them as earnings and prices change. Still, they can become a psychological or de facto resistance area when upside expectations are priced in and investors hesitate to chase gains. A decisive move above 7,900 would likely require stronger earnings revisions, lower yields or renewed confidence that supports higher valuations.
Figure 11: 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 12: Updated S&P 500 cycle composite for 2026 and 2027.
U.S. Economic Releases:
Last week’s data portrayed an economy that is still expanding, but unevenly. Regional manufacturing surveys strengthened sharply, services PMI rose to 56.8, industrial production increased 0.2%, and jobless claims fell to 206,000, signaling resilient business activity and labor demand. Housing remained the weak link, with starts below expectations and pending sales falling 2.3%, despite firmer permits. Inflation news was encouraging: import prices declined 0.4% and energy inventories rose. Overall, growth remains intact while goods-price pressures appear contained.
This week’s focus is Wednesday’s core PCE, GDP price index, spending and income, which will clarify whether inflation is easing without undermining growth. Friday’s benchmark payroll revision could reset labor-market picture. Consumer confidence, housing data and claims will add context, while Jackson Hole may reshape expectations for interest rates and Fed policy.
Figure 13: U.S. Consumer and Labor Trends.
Figure 14: Economic release calendar. Source: Forexfactory.com
Bottom Line: Equities remain supported, but the margin for error is narrowing. The Catastrophic Stop Model held at 68.18%, supporting benchmark exposure, while the Sentiment Composite’s 72 reading signals excessive optimism. Earnings remain the strongest support: 63-day revisions are in the 97th percentile, forward EPS is growing 34.9%, and its three-month change remains positive despite slowing. Health Care and Energy lead breadth and momentum; Technology’s fundamentals remain strong, although positioning and yields are creating volatility. Economic data show resilient services, manufacturing and labor, but weak housing. Core PCE, payroll revisions and Jackson Hole could determine whether consolidation extends into autumn.
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.
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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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Definitions
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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