Day Hagan Catastrophic Stop Update August 5, 2025
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The DH Catastrophic Stop model declined to 72.7% from 77.27% last week. The decline stemmed from our breadth thrust composite turning neutral, as the initial bullish signal’s impact was programmed to diminish over time, consistent with historical patterns. The model indicates that investors should maintain their benchmark equity exposure.
Figure 1: DH Catastrophic Stop Model.
We have been expecting a period of short-term consolidation due to overbought conditions, excessive optimism, and seasonality. We continue to do so. Over the past month, the NDX is up 1.72%, SPX 1.05%, RSP (equal-weighted S&P 500) -0.64%, DJIA -1.18%, RTY -1.24%, and the VIX is up 6.53% (as of this writing). In other words, there has been minor consolidation on a broader scale, but the narrow leadership of the largest names continue to support the cap-weighted indexes. Our model, which focuses on the S&P 500, continues to rate the longer-term trend as positive.
The net result is that we continue to expect a shorter-term period of consolidation before the market resets for the next leg higher. Of course, should our models turn negative, we will quickly raise cash.
Figure 2: Excessive optimism is waning, in line with our view that the market is likely to take a breather. A decline below 70 would generate a short-term sell signal.
Some of the overbought condition has been worked off already. For example, the 21-day RSI for the S&P 500 pulled back as the index declined below the 21-day MA.
Figure 3: The S&P 500 is still more overbought than oversold, but extreme readings have moderated (source: Barchart).
The equal-weighted S&P 500’s RSI is a little lower than the cap-weighted index.
Figure 4: RSP hasn’t quite recaptured it’s 21-day MA. Note that stronger rallies have tended to ignite when the RSI is closer to the 30 level.
Interestingly, only 38.96% of the S&P 500 stocks are above their respective 50-day MAs, while just 38.94% are above their 200-day MAs. We view this as indicating that some of the excess has already been worked off. Note: We do not expect to see levels similar to late-2024, early-2025 or April 2025 unless a hard-landing scenario becomes more probable.
gure 5: Short-term and longer-term breadth indicators are more neutral (source: StreetStats)
Funds targeting 10% volatility reached exposure levels similar to what we saw in mid-2021and May 2024, but lower than the 2017 and 2018 peaks.
Figure 6: Funds targeting 10% volatility have an implied equity allocation of 100.8%, which is also toward the higher end of the historical range shown.
The iMGP DBi Managed Futures Strategy ETF (DBMF) is an actively managed fund aiming for long-term capital appreciation by replicating the performance of top commodity trading advisor (CTA) hedge funds. It uses long and short positions in futures and forward contracts across equities, fixed income, currencies, and commodities. From an equity allocation perspective, DBMF’s exposure confirms the message from the previous chart.
Figure 7: Systematic and algo-driven strategies leaning toward being more fully invested.
Interestingly, GS shows that the 20-day decline in their Prime Book Gross Exposure was the largest since March 2020. That happened fast!
Figure 8: Equity exposure among institutional investors is relatively high, but off the peak. This chart shows how quickly the backdrop of supply and demand can shift.
Some quotes on market positioning today (via MarketEar):
Nomura:
McElligott on volatility controlled funds, here “…would only turn modest seller of Equities if daily SPX chg was maintained in a ~1% area for the next week or two …otherwise, a resumption of “50bps chg” type days in coming weeks is still a “buy””
Goldman Sachs:
“Relative to last year, tactical positioning is less demanding. Prior to the August 2024 hiccip, S&P Non-Dealer net length in notional terms ranked at 90% on a 1 year basis. Recently updated Commitment of Traders, covering through July 29th, 2025, displayed a 10% 1 year rank”.
J.P. Morgan:
“Last week marked the largest drop in overall leverage since June 2023 (-6 pp). This week, leverage fell another 5 pp. On a 1-year lookback, that leaves levels in the 45th percentile. While systematic long/shorts have underperformed discretionary peers for six straight weeks, our analysis suggests stress from elevated gross exposure is now more contained.” (Tony P)
The VIX index and realized 30-day S&P 500 volatility remain contained.
Figure 9: VIX levels quickly reversed back below the widely-watched 20 level. Constructive.
Expected Move based on Options Pricing: “The Expected Move, which is also referred to as Implied Move, reflects the price range that a security is expected to move from its current price. The Expected Move is calculated based on 85% of the value of the at-the-money straddle. The range as predicted by the expected move can be used to target high and low prices and is especially useful around earnings season. The chart reflects the prior six months of price activity, followed by the expected move based on the next two weekly and monthly options contracts.”
Figure 10: The upper and lower range levels for the August 15 OPEX are 6,244 and 6,439. Note: Projected levels become more meaningful as OPEX approaches (source: Barchart).
We continue to feature this chart, showing that earnings forecasts continue to follow the path associated with “No Recession within 12 Months.”
Figure 11: Earnings tracking the no-recession path on the way to all-time highs.
3Fourteen research shows that the S&P 500 has done well when earnings are within 1% of all-time highs.
Figure 12: Since 1990, when S&P 500 Forward 12-month EPS have been within 1% of an all-time high, the index gained at a 12.4% annualized rate, and the max drawdown was significantly reduced.
Speaking of earnings, estimates continue to drift higher. For example, on June 30, forecasts were from S&P 500 Q2 y/y earnings growth of 4.9%. The forecast is now for a much stronger 10.3%. It was just a month ago that we were discussing Q2 as being a “trough quarter” for earnings.
Figure 13: Earnings estimates being revised higher for Q2. Only Utilities, Health Care, and Materials have moved lower. (Note: The earnings turnaround for Consumer Discretionary is particularly impressive.)
Figure 14: Q3 y/y earnings growth estimates also moving higher.
Valuations remain a key consideration for us, though they appear overlooked by the broader market. However, this serves as a cautionary signal rather than an immediate call to action. We require confirmation from our indicators that market sentiment is shifting toward nervousness, reflected in our technical and operating environment metrics, before adopting a more defensive posture.
Figure 15: Valuations remain a significant concern, underscoring our commitment to disciplined investing. Our quantitative models mitigate emotional biases, ensuring alignment with prevailing market trends and maintaining a strategic, data-driven approach.
Of course, the hopes for rate cuts can support the valuation. Investors are now looking for the fed funds effective rate to move to a 3-handle this year.
Figure 16: Investors love lower rates.
Given the weak employment report on Friday, talks of a hard landing have intensified. While we understand the concern, in past Updates we have discussed several factors that would need to shift negatively before our models mandate major changes to the portfolio. We feature a few below.
First, we like to keep an eye on the trend of the Atlanta Fed GDPNow real GDP estimate. While far from perfect, it does provide a real-time, data-driven viewpoint using 13 subcomponents (PCE, private investment, exports, government spending, and the subcategories for each).
Although early in the quarter, the Atlanta Fed notes, “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2025 is 2.5 percent on August 5, up from 2.1 percent on August 1. After recent releases from the US Bureau of Economic Analysis, the US Census Bureau, and the Institute for Supply Management, increases in the nowcasts of real personal consumption expenditures growth and real gross private domestic investment growth from 1.6 percent and 6.3 percent, respectively, to 2.0 percent and 6.9 percent, more than offset a decline in the nowcast in the contribution on net exports to GDP growth from -0.30 percentage points to -0.36 percentage points..”
Figure 17: Atlanta Fed GDPNow = so far, so good for Q3 economic activity. But it’s still early.
The Weekly Economic Index, at 2.56 as of July 26, 2025, tracks real economic activity using ten high-frequency series on consumer behavior, labor, and production, scaled to four-quarter GDP growth. Components include Redbook sales, Rasmussen Consumer Index, unemployment claims, tax withholdings, railroad traffic, staffing, steel, fuel sales, and electricity load, expressed as year-over-year changes, aggregated into a single weekly index.
Figure 18: WEI forecasting trend economic growth. The WEI reading of 2.56 percent suggests that GDP has increased 2.56% higher than a year previously.
The St. Lousi Fed’s Financial Stress Index level of -0.795 (as of July 15) indicates that stress is minimal based on 18 weekly data series, including interest rates, yield spreads, and volatility indicators. Zero represents normal conditions; positive values indicate above-average stress, and negative values indicate below-average stress.
Figure 19: War, tariffs, BBB, trade tensions, political turmoil, and a spike in energy prices weren’t enough to stress out the financial markets for more than a day or two this year.
The composite below is based on non-farm payroll employment, industrial production trends, real personal income minus transfer payments, and real manufacturing and trade sales. The model does not currently forecast a recession.
Figure 20: The U.S. Recession Probability Model remains constructive for U.S. economic activity.
We’d also note that inflation trends are still heading in the right direction (it’s never a straight line).
Figure 21: The annual inflation rate has ticked up from 2.3% in April to 2.7% in June, but the 10-year Treasury yield has declined from 4.79% in January to 4.22% today. This indicates that the bond market is looking past potential inflation hiccups.
Upcoming Reports We’ll be Watching Closely
Figure 22: We’ll be focusing on the 10-year bond auction, unemployment claims, and the 30-year bond auction this week. Notwithstanding earnings’ reports.
Conclusion
Excessive optimism and short-term overbought conditions persist but have moderated somewhat. So far, the markets have looked past the potential headwinds. We expect a period of consolidation, which could take the form of a sideways market or a minor pullback, both of which we would consider healthy for the longer-term uptrend. Our longer-term indicators remain constructive.
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 – 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.
Earnings Per Share (EPS) - is a commonly used measure of a company's profitability. It indicates how much profit each outstanding share of common stock has earned. Generally speaking, the higher a company's EPS, the more profitable it is considered to be.
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