Day Hagan Catastrophic Stop Update December 11, 2024
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The Catastrophic Stop model improved to 67.9% from 60.7% last week. The Internal Composite is bullish, and the External Composite is neutral.
Figure 1: The Catastrophic Stop model vs. the S&P 500 Total Return Index.
The model’s increase is the result of the Global Breadth Factor turning positive.
Figure 2: Some signs of breadth improvement. Often occurs during year-end rallies.
Short-term sentiment has peaked but remains in the “Excessive Optimism” zone. Still a minor headwind.
Figure 3: Sentiment is overly optimistic.
The 2024 Cycle Composite illustrates the equity market’s historical upward tendency as the year closes out.
Figure 4: Positive year-end seasonality is still in play. Somewhat of a counter-balance to the excessive optimism.
Demand continues to outpace supply. A bullish underpinning.
Figure 5: Based on volume-adjusted demand, buyers are in control.
Economic activity, while slightly below trend, is positive. The Global Recession Probability Model has reversed back into the “Low Recession Risk” zone.
Figure 6: Global economic activity is still rated as positive. The model below further supports this view.
The U.S. Economic Timing Model continues to portray an environment of “Slow Growth.” Historically, the Index of Coincident Economic Indicators has increased at a 2.12% annualized rate when the model has been in this zone.
Figure 7: U.S. economic growth is OK.
There has been some discussion around the potential for inflation to reassert. One of the indicators we monitor is the Continuous Commodity Index (CCI). The three-week moving average of the annual rate of change is on the cusp of moving into the “High Inflationary Pressures” zone. While this alone wouldn’t cause us to rebalance in anticipation of an inflation spike, it certainly would place us on high alert. To be clear, the indicator is currently rated neutral.
Figure 8: We’re keeping a close eye on our inflation indicators, with many starting to show signs of budding inflationary pressures.
Figure 9: Commodity breadth shows that 10 of 19 commodities are trading above their respective 200-day moving averages and have rising 200-day moving averages. Historically, this has been inflationary. But notice that the indicators are both hovering around the 50% threshold. Given the indicator evidence, we remain neutral on inflation.
We’ve discussed earnings many times over the past months, with the view that earnings will have to carry equities higher, rather than multiple expansion. So far, earnings are holding up, but the percentage of companies with positive earnings surprises has been drifting lower. If we start to see a series of misses, inflationary pressures grind higher, and decelerating economic growth, the Catastrophic Stop model will likely turn bearish.
Figure 10: So far, so good. However, trees don’t grow to the sky.
The S&P 500 GAAP Earnings model continues to support moderate earnings growth. Note in the statistics box that earnings tend to do well in this zone. A decline below 40 would be concerning.
Figure 11: S&P 500 GAAP Earnings model is neutral.
If you were wondering what indicators are represented in the Earnings Model, the table below details each time series. Bullish indicators include pricing power, credit spreads, EPS momentum, and percent of upward revisions.
Figure 12: The diverse array of indicators within the earnings model covers many financial market influences. It’s all about the weight of the evidence.
It would be nice to see a Breadth Thrust as we end the year. Unfortunately, there are currently no breadth thrust indications in play at this time.
Figure 12: A series of breadth thrusts would help provide an “all-clear” signal for at least the next year.
With inflationary pressures showing signs of building, rates are taking notice. One of the indicators we track is the 26-week rate of change for the Moody’s Baa (medium grade, investment grade) bond yield. A rise above 6% has historically been negative for stocks. At this point, the indicator remains supportive for equities.
Figure 13: With inflationary pressures on our radar, we are monitoring several fixed-income relationships to see if bond investors are potentially getting nervous.
We’ve featured this chart quite a bit. It illustrates S&P 500 performance around first rate cuts, as well as performance during fast rate cut cycles and slow rate cut cycles. The current cycle is shown in light blue. As you can see, the current cycle is dovetailing nicely with historically slow rate cut cycles. This is positive, since the average 1-year percentage change is 24.42%.
Figure 14: History shows that slower rate cut cycles are bullish over the first year. We are currently about three months into this cycle (first cut was on 9-18-2024).
Bottom Line: The Catastrophic Stop model continues to recommend a fully invested (matching your benchmark) position. There are signs of burgeoning inflationary pressures, but they are not yet considered a major impediment. Economic growth is OK, and earnings are holding up. As our indicators shift, we will adjust the portfolio accordingly, up or down. At this point, our models' collective message is that the uptrend is intact.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. As has been the case for all of 2024, the broader-based composite models calling U.S. economic growth, international economic growth, inflation trends, liquidity, and equity demand remain constructive. The Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will raise cash.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk and where to place 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 convenient time.
I hope you have a wonderful week,
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. Charts courtesy Ned Davis Research (NDR). © Copyright 2024 NDR, Inc. Further distribution is prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
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.
S&P 500 Information Technology – Comprised of those companies included in the S&P 500 that are classified as members of the GICS information technology sector.
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.
Continuous Commodity Index (CCI) – Measures the current price level relative to an average price level over a given period of time. CCI is relatively high when prices are far above their average. CCI is relatively low when prices are far below their average.
Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Asset Management, any of its affiliates or employees, or any third-party data provider shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. Day Hagan Asset Management accounts that Day Hagan Asset Management or its affiliated companies manage, or their respective shareholders, directors, officers, and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. Day Hagan Asset Management uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of Day Hagan Asset Management’s past recommendations and model results is not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
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