Day Hagan Catastrophic Stop Update August 31, 2026
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Summary
The Day Hagan Catastrophic Stop Model declined to 59.09% from 68.18% last week due to the High-Yield Bond Breadth indicator moving back to a sell signal. 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.
High-yield breadth slipped to –3.99, showing weaker participation but remaining above the –10 threshold—caution, not a breakdown. Bonds struggled mainly after hotter inflation and Fed Chair Warsh’s firm Jackson Hole message increased expectations for another rate hike. The two-year Treasury yield jumped roughly 12 basis points Friday, hurting bond prices, while high-yield spreads widened as risk appetite softened.
Figure 2: High-Yield bond breadth generating a yellow flag.
The Day Hagan composite closed at 64.24, showing optimism has rebuilt but has reversed below the 70 excessive-optimism threshold. Other gauges are mixed: the VIX ended at 14.43 and the CBOE equity put/call ratio at 0.62, indicating little fear. AAII was more cautious, with 32.9% bullish and 44.4% bearish, while CNN Fear & Greed was neutral at 54. Sentiment is now neutral, not euphoric.
Figure 3: Sentiment neutral. The reversal bears close scrutiny.
Portfolio Outlook
The table supports selective risk-taking. Technology combines strong earnings growth, a low PEG and substantial target upside, although only half its stocks exceed their 50-day averages. Energy and Financials have the strongest breadth, but Energy’s projected 2027 earnings decline argues against chasing. Communication Services and Materials offer attractive upside with healthy momentum. Real Estate and especially Utilities show weak short-term breadth. Overall, powerful S&P 500 earnings expectations are offset by elevated valuation and uneven participation.
Figure 4a: S&P 500 Sector Fundamentals and Technicals
Figure 4b: S&P 500 Sector Fundamentals and Technicals
Sector Weekly Updates:
For the week ended August 28, the S&P 500 gained 0.5% on a price-return basis. Communication Services, Information Technology, and Financials led, while Health Care, Industrials, and Energy were the weakest sectors. Nvidia’s exceptional outlook and Salesforce’s earnings-driven surge revived technology leadership, although hotter inflation data and Fed Chair Kevin Warsh’s firm inflation message pushed yields higher Friday and limited the market’s advance.
Consumer Discretionary: Amazon advanced after analysts highlighted improving retail efficiency, while DoorDash, Carvana, and Chipotle also gained. Aptiv, Wynn Resorts, Ralph Lauren, and Ross Stores weakened. The split favored companies with company-specific catalysts while leaving housing-sensitive, travel, and higher-multiple consumer names exposed to tighter financial conditions.
Consumer Staples: J.M. Smucker gained after revenue increased and adjusted earnings benefited from a tariff refund, while General Mills and Altria also advanced. Hormel dropped nearly 10% after an earnings beat was overshadowed by a sales miss and cautious guidance. Tyson Foods and Casey’s also declined, showing that pricing, volumes, and cost control remain decisive.
Communication Services: Meta, AppLovin, Trade Desk, and Paramount Skydance advanced as Nvidia’s forecast strengthened confidence in digital advertising, cloud investment, and data-center demand. TKO Group and Take-Two Interactive lagged. The rebound was meaningful, but leadership remained concentrated in businesses capable of translating heavy technology spending into faster revenue growth.
Energy: Crude prices retreated early in the week after U.S. sanctions against Iran proved less severe than feared. EOG Resources, Diamondback Energy, and Exxon weakened, while SLB, Halliburton, Williams, and Marathon Petroleum advanced. The divergence favored service, pipeline, and refining companies over producers most sensitive to movements in crude prices.
Financials: Wells Fargo, State Street, CME Group, Cboe, and several insurers advanced as strong capital-markets activity and a steeper policy outlook supported earnings expectations. PayPal fell sharply after reported acquisition discussions ended, while Coinbase and Robinhood weakened. Traditional banks and exchanges outperformed more speculative financial platforms.
Health Care: The sector reversed part of the prior week’s advance. Boston Scientific declined after a cyberattack disrupted systems used to process and ship orders, while Eli Lilly, CooperCompanies, and Moderna also weakened. Veeva Systems rallied after its report, and McKesson, DaVita, and ResMed gained. The sector’s internal performance remained highly dependent on company-specific developments.
Industrials: Generac, Comfort Systems, United Rentals, and Quanta Services fell as investors reduced exposure to expensive infrastructure and data-center beneficiaries. Comfort Systems was also pressured by insider selling after a major advance. C.H. Robinson, UPS, ADP, and Verisk gained. Strong order books remain supportive, but high valuations leave little tolerance for slower growth.
Information Technology: Salesforce surged after its report, while CrowdStrike, ServiceNow, Synopsys, and Nvidia also advanced. Nvidia’s revenue more than doubled, and management projected powerful growth extending into its next fiscal year, easing concerns that AI infrastructure spending was nearing a peak. Marvell, SanDisk, Qualcomm, and Applied Materials declined, underscoring the market’s increasingly selective treatment of semiconductor companies.
Materials: International Flavors & Fragrances, Nucor, Steel Dynamics, and Corteva gained, while LyondellBasell, Dow, International Paper, and Packaging Corporation of America weakened. The pattern favored agricultural inputs and steel over chemicals and packaging. Softer oil prices helped some input costs, but uncertainty surrounding industrial demand and global trade limited broader participation.
Real Estate: SBA Communications, Boston Properties, Crown Castle, and American Tower outperformed, while Host Hotels, Iron Mountain, Alexandria Real Estate, and Weyerhaeuser declined. The 10-year Treasury yield finished near 4.72% and the 30-year near 5.21%, slightly below the previous Friday despite a late-week increase. Rate competition remains substantial, but communications infrastructure found selective support.
Utilities: American Water Works, Sempra, Constellation Energy, and CenterPoint advanced, while PG&E, NextEra Energy, Edison International, and NRG declined. The sector benefited from slightly lower weekly long-term yields, but Warsh’s inflation warning renewed rate pressure Friday. Electricity-demand expectations remain favorable, although financing costs and crowded power-demand trades continue to separate winners from laggards.
Figure 5: Sector Relative Strength vs. S&P 500
Market breadth is healthy over the longer term but increasingly uneven short term. Energy and Health Care show the strongest participation, with more than 75% of constituents above both moving averages. Financials and Technology retain strong 200-day breadth, although fewer stocks remain above their 50-day trends. Real Estate has deteriorated sharply, while Utilities display the weakest participation. Consumer sectors, Industrials and Communication Services remain mixed. The market’s foundation is intact, but leadership has narrowed.
Figure 6: Breadth remains supportive, overall.
Sector momentum is broadly positive but not overheated. Seven sectors have both RSI readings above 50, led by Energy, Financials, Health Care and Materials. Technology remains modestly positive rather than extended, leaving room for renewed leadership. Consumer Discretionary and Communication Services have also improved. Real Estate and Consumer Staples are crossing the midpoint and require confirmation. Industrials and Utilities are the clear laggards, with both readings below 50. No sector is currently overbought, reducing immediate reversal risk.
Figure 7: Sector RSIs.
Volatility target funds have increased equity exposure and are nearing +1 SD on a 5-year rolling basis. This is consistent with our Sentiment Composite’s message: Optimism in place, but not quite at overheated, overly-optimistic levels.
Figure 8: Vol-targeting funds’ exposure increased again. Another yellow flag (caution).
Our proxy for managed futures and trend followers indicates exposure to the S&P 500 held relatively steady.
Figure 9: Positioning indicators remain mixed, but the overall message is “high neutral.”
Earnings revisions remain a major market support. S&P 500 forward estimates have increased 9.5% over 63 days, a 98th-percentile reading. Technology leads, while Health Care, Industrials, Consumer Discretionary and Communication Services also register historically strong upgrades. Financials and Real Estate remain elevated. The weakness lies in Energy, where revisions have collapsed from their June peak, while Materials, Staples and Utilities are merely average. The signal favors earnings leaders, although recent flattening suggests the upgrade cycle may be maturing.
Figure 10: Earnings continue to support equities.
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 described an economy still growing, but with widening soft spots. GDP held at 1.5%, claims remained low at 203,000 and income rose 0.4%, yet consumer confidence weakened, new-home sales fell and Chicago PMI plunged into contraction. Spending increased only 0.2%, while the trade deficit widened. Inflation offered little comfort: core PCE rose 0.2%, and the GDP price index accelerated to 6.4%. Falling inflation expectations helped, but the Fed still lacks a clean easing signal.
This week centers on growth, employment and inflation. ISM Manufacturing is expected to remain firmly expansionary at 55.2, although its Prices Index may hold above 71. Services activity should remain steady near 54.1. JOLTS openings are projected to ease slightly, while ADP employment improves modestly. Friday’s payroll report is the main event: economists expect 58,000 new jobs, unemployment unchanged at 4.1% and wages rising 0.3%. Together, the forecasts suggest moderate growth, limited hiring and persistent price pressure.
Figure 12: U.S. ISM activity and price pressures.
Figure 13: Economic release calendar. Source: Forexfactory.com
Bottom Line: The market’s engine is still running, but several dashboard lights have turned yellow. The Catastrophic Stop Model slipped to 59.09% as high-yield breadth weakened, while sentiment retreated from excessive optimism to a still-elevated 64.24. Earnings remain the strongest support: forward estimates have risen at a 98th-percentile pace, led by Technology and other growth sectors. Yet participation is narrowing, Utilities and Real Estate are deteriorating, and inflation is keeping the Fed from offering relief. Strong Nvidia and Salesforce results helped stocks advance, but our cycle work warns of possible weakness into October. Stay invested, favor earnings leaders, and maintain market exposure while preserving flexibilities as investment opportunities may evolve through year-end.
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.
This material is intended to provide general market commentary and should not be relied upon as individualized investment advice. Investors should consult with their financial professional before making any investment decisions based on this information.
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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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