Day Hagan Catastrophic Stop Update December 9, 2025
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Day Hagan Catastrophic Stop Update December 9, 2025 (pdf)
The Day Hagan Catastrophic Stop model remains steady at 68.18%. The model continues to indicate that investors should maintain their benchmark equity exposure.
Figure 1: The Catastrophic Stop model would generate a sell signal by closing below 40% for two consecutive days. The current message is positive, indicating investors should maintain benchmark equity exposure.
Strange valuation dynamics are showing up in market performance this year. With the equity risk premium compressed, investors have been willing to look far past near-term fundamentals and instead pay up for long-duration, higher-risk growth exposure.
As a result, unprofitable companies are dramatically outperforming profitable ones in terms of stock price returns. As shown below, Nasdaq companies with no revenue have led the market, posting the strongest average year-to-date gains and significantly outperforming both profitable Nasdaq companies and profitable small- and mid-cap stocks. Even within the broader Nasdaq universe, firms without profits have meaningfully outpaced those with positive earnings and revenues.
This theme aligns with what we’ve observed across asset markets more broadly in 2025: returns have been driven less by cash flows and fundamentals, and more by expectations, liquidity, and multiple expansion. When investors require very little compensation for risk—as evidenced by today’s narrow spread between the S&P 500 earnings yield and the 10-year Treasury—speculative assets tend to benefit the most.
Taken together, the combination of a compressed equity risk premium and outsized gains in unprofitable companies suggests markets are pricing in highly favorable outcomes and remain vulnerable should economic growth expectations, liquidity conditions, or interest-rate assumptions shift.
Figure 2: Best performers this year? Nasdaq companies with no revenues!
The outperformance of Nasdaq stocks with no revenue complicates our view of investor sentiment. One would likely take the view that if investors are willing to bet on no-revenue companies, then they must be optimistic. But our Daily Sentiment Composite is squarely in the pessimism zone. How do we reconcile “speculative enthusiasm” with “fear-zone” sentiment signals?
On the surface, the strong performance of Nasdaq companies with no current revenue looks like classic risk-on speculation, suggesting investors are optimistic about future growth. Typically, that would coincide with high sentiment readings. Instead, the Sentiment Composite sits in pessimism, signaling broad caution.
The key reason, in our view:
A narrow subset of investors is expressing speculative optimism, while the majority remains defensive.
More specifically:
Market leadership is extremely concentrated
A small group of investors is chasing high-beta, high-story names, while most remain hesitant. Narrow participation can coexist with negative overall sentiment.Macro fear + micro speculation
Investors may be pessimistic about the economy but still willing to overpay for perceived “future winners” in tech/AI—what’s working today.Carry-trade and momentum mechanics
Even in fearful markets, systematic flows (quant, momentum, volatility-control strategies) can push certain segments higher, especially low-float, narrative-driven stocks.Hedging activity suppresses sentiment indicators
Put-buying and credit-spread protection can drag the Sentiment Composite lower—even as pockets of speculation remain active.
Bottom line
This is not broad “greed.” It’s selective speculation inside a fearful market. This setup can persist but often reflects late-cycle behavior—investors crowd into a narrow group of perceived winners while remaining risk-averse elsewhere.
Figure 3: The DH Daily Market Sentiment Composite is a broad-based measure. It reflects investor pessimism.
Volatility has spiked twice since the beginning of October. In mid-October, due to renewed tariff concerns, and in mid-November, due to anxiety over large-cap growth and AI stocks. Both spikes were short-lived, as protective puts and hedging activity accelerated (which we featured at the time). Volatility episodes like these often reveal fragility — not necessarily structural crises, unless confirmed by other indicators we track. They highlight where risk is concentrated (rate-sensitive growth, leverage, liquidity), giving investors a chance to reassess exposure or add hedges.
Currently, both the VIX and MOVE indices are indicating that investors don’t foresee a significant dislocation.
Figure 4: VIX below 20 is constructive for equities. Source: StreetStats.
The MOVE index tends to inversely correlate well with equity performance. It too is at the lower end of this year's range.
Figure 5: MOVE index indicates low bond volatility. Note: Today’s 10-year auction was supportive of bonds. Source: StreetStats.
We are also noting an increase in market breadth. This is positive.
Figure 6: The percentage of Russell 3000 stocks above their respective 50-day MAs is now 54.8%.
High-Yield bond breadth is following suit. The rally in small caps is supportive.
Figure 7: High-yield bond breadth has improved.
We rate systematic/algo positioning as neutral, but slightly elevated. Not too hot, not too cold. Generally supportive of upside as long as the macro and the Fed cooperate.
Figure 8: Positioning neutral, but slightly elevated.
The market's gamma is currently positive, but a decline below 6,767 would put it back into negative gamma, potentially injecting more volatility into the mix.
Figure 9: Gamma condition is currently positive.
Strategist forecasts have finally caught up to the market. Historically, year-end forecasts have averaged 5.7% above the market’s price (since 1999). Currently, the spread is 6.2%. Again, not too hot, not too cold.
Figure 10: Strategist expectations for an upmove consistent with longer-term history. However, since 2023, potentially a little extended.
Of course, all eyes will be on the FOMC meeting tomorrow. It’s almost a foregone conclusion that a hike will happen. At this point, it’s about the SEP, dot-plot, and guidance. We’ll be watching rates to see if there is an increase or decrease after the announcement and into Thursday. That’ll be the tell. Our view is that the Fed put is in play, but they won’t worry too much about a 3-5% pullback.
Figure 11: The Fed funds rate forecast shows investors are currently pricing in a 3.09% Fed funds rate toward the end of 2026 (not on the chart). That is now the hurdle rate; a shift higher would be bearish, and a shift lower would be bullish.
We would also note that economic liquidity has been improving. Along with a pause in QT and the prospects for lower rates, the global M2 money supply has been increasing. This is supportive.
Figure 12: Global M2 Money Supply increases over the past three months are constructive. However, over the past month, the U.S. has led the way, while Japan has taken a more restrictive path. We’re watching to see Takaishi’s response, as she has staked out a stimulative stance.
The NFIB survey is one of our favorite data series. Small companies have historically created about two-thirds of all jobs. The most recent update indicates that Small Business Optimism has improved.
Figure 13: Small Business Optimism Index.
Segments of the survey looking better include: Plans to increase employment, Expect real sales to be higher, Current inventory is too low, Current job openings, and Earnings trends. More negative responses came from Plans to Make Capital outlays, Expect the economy to improve, and expected credit conditions. Overall, a more positive message for the U.S. economy.
Figure 14: Survey Components
The Citigroup Economic Surprise Index confirms that economic releases over the past three months have, on average, outperformed expectations.
Figure 15: ESI is in positive territory.
Upcoming U.S. Economic Releases
Last week’s U.S. economic data releases reflected a mixed but generally stable environment. Manufacturing signals were uneven: the ISM Manufacturing PMI slightly missed expectations while manufacturing prices cooled modestly. Capacity utilization and industrial production showed incremental improvement, hinting at stabilization in goods activity. Labor data was more concerning, with ADP employment unexpectedly contracting and Challenger job cuts rising sharply, though unemployment claims came in better than forecast. Consumer-related indicators were cautiously constructive — personal income and spending both rose, and sentiment surveys surprised to the upside. Inflation readings, including Core PCE and University of Michigan expectations, remained above target but not accelerating. Overall, the data continues to show slow growth and lingering inflation pressures, with pockets of resilience offset by labor-market softness.
JOLTS job openings were a little better today.
10-year auction went well today.
ECI and FOMC tomorrow.
Unemployment Claims on Thursday. Also, the 30-year bond auction.
Figure 16: Economic Calendar for the Week.
Bottom Line: Recent U.S. economic releases painted a picture of an economy that remains stable but uneven beneath the surface. Manufacturing data continued to send mixed signals: the ISM Manufacturing PMI slipped slightly below expectations, indicating soft demand, while manufacturing prices decelerated modestly, suggesting easing cost pressures. At the same time, capacity utilization and industrial production posted small gains, hinting that the goods sector may be finding a floor. Labor market data was more cautionary, with ADP reporting a surprising decline in private payrolls and Challenger job cuts moving sharply higher. However, weekly unemployment claims improved, signaling that layoffs have not broadened. On the consumer side, the backdrop was more supportive. Personal income and spending both advanced, and sentiment surveys exceeded expectations, showing household resilience. Inflation indicators such as Core PCE and inflation expectations stayed above target levels but showed no signs of reacceleration. Overall, growth appears positive but subdued, while inflation progress remains slow, and the labor market shows early signs of softening. We remain constructive on U.S. equities.
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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
This material is for educational purposes only. Further distribution is prohibited without prior permission. Please see the information on Disclosures 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, MarketEar, S&P Global, SPDR, FactSet.
Disclosures
S&P 500 Index—An unmanaged composite of 500 large-cap 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. Professional investors widely use this index as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Sentiment – Market sentiment is the prevailing attitude of investors toward a company, a sector, or the financial market.
CBOE Volatility Index (VIX) – A real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from SPX index options with near-term expiration dates, it produces a 30-day forward volatility projection. Volatility, or how quickly prices change, is often seen as a way to gauge market sentiment, particularly the degree of fear among market participants.
OBOS Indicators—The overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price to the trade margin of the given period.
NFIB – The National Federation of Independent Business advocates for America’s small and independent business owners.
Purchasing Manager Indexes (PMIs) – Purchasing Managers’ Indexes are survey-based economic indicators designed to provide timely insight into business conditions.
FOMC Meeting – The FOMC (Federal Open Market Committee) holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-term goals of price stability and sustainable economic growth.
Consumer Price Index (CPI) – Measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
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