Day Hagan Catastrophic Stop Update December 31, 2025
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Day Hagan Catastrophic Stop Update December 31, 2025 (pdf)
The Day Hagan Catastrophic Stop model declined to 59.09% from 68.18% last week. The model continues to indicate that investors should maintain their benchmark equity exposure.
The model’s decline resulted from one of our economic activity measures turning negative. The Baltic Dry Index, a benchmark for global shipping rates of dry commodities like coal and iron ore, has trended lower, falling over 18% this month to 1,877 points (as of 12/24). This weakening is primarily driven by low seasonal demand, which is significantly impacting Capesize vessel rates (a Capesize vessel is a large cargo ship too big for canals, navigating via Capes) and signaling potentially softer global trade activity.
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.
The recent buy signal from the Daily Market Sentiment Composite supports the continuation of the current uptrend. Overall, sentiment leans positive but is not at extreme exuberance, which historically is constructive for ongoing market strength.
Figure 2: Sentiment shows optimism returning.
Positioning indicators remain essentially unchanged from last week, with equity exposure for algos and systematic traders holding moderately above neutral. Overall, systematic investor positioning is constructive but not stretched.
Figure 3: Positioning moderately above neutral.
From an overbought/oversold perspective, the S&P 500 is currently in a neutral zone. The Nasdaq Composite also remains in neutral territory, showing neither index is extended in either direction. This balanced OBOS condition suggests there is no immediate technical pressure for a reversal in either index.
Figure 4: The S&P 500 is neither overbought nor oversold, based on the 14-day RSI.
The current gamma condition for the S&P 500 is positive, as options positioning data indicate significant net positive gamma across major strikes. This positive gamma environment, as confirmed by dealer positioning reports and recent options market data, typically dampens intraday volatility and supports market stability. As a result, volatility has remained subdued, and price swings have been contained. Heading into the last day of the year, this constructive gamma setup suggests a favorable backdrop for equities, with less risk of sharp, disorderly moves barring an unexpected catalyst.
Figure 5: SPX gamma condition is currently favorable.
As featured last week, December seasonality remains bullish, but January performance has been inconsistent since 2010, with the month posting gains just 56% of the time. Heading into January 2026, market expectations are cautious: corporate buybacks are expected to slow due to earnings blackout windows, and consensus 2026 S&P 500 earnings growth forecasts (FactSet: +15.0%) may prove optimistic if Q4 reports fall short. The Federal Reserve is widely expected to remain on hold, with a January rate cut not fully priced in. Elevated equity valuations suggest limited multiple expansion, increasing the likelihood of rotation beneath the surface, particularly into high-quality and defensive sectors.
Looking at the whole year (2026), most Wall Street strategists expect moderate gains for U.S. stocks, with S&P 500 year-end targets generally around 7,555. Bond market expectations are for stable to modestly lower yields, as inflation continues to ease, and the Fed remains somewhat accommodative. Investment-grade and high-yield spreads remain tight, indicating constructive risk sentiment. Overall, the outlook is for positive but subdued returns, with volatility likely to pick up as the economic cycle matures and policy uncertainty persists.
Figure 6: January gains since 2010 have been mixed.
The chart below bears repeating. It illustrates 1-year total return performances leading up to historical market peaks: the 1987 Japan Financials surge, Europe’s TMT rally in 2000, U.S. tech in 2000, and the current U.S. tech advance. Compared to these past cycles, today’s U.S. tech run appears much less extreme, suggesting valuations and returns remain reasonable relative to previous bubbles. We’ll take this with a grain of salt, but we thought it was interesting enough to show again.
Figure 7: Is Technology in a bubble? And if so, how does it compare to past bubbles? You be the judge.
Factors to watch in January 2026:
While our indicators remain generally constructive, we’re keeping an eye on the following inputs for signs that there may be some early softness in January.
Buybacks and blackout windows.
A large number of companies will be entering a pre-earnings blackout, which would temporarily remove a significant source of demand, mainly because buybacks have been unusually concentrated in mega‑caps and tech.
Any regulatory noise around repurchases or management signaling slower buyback authorizations could further undercut the expected “corporate bid.”
Positioning, leverage, and systematic flows.
If CTAs, vol‑control, and risk‑parity funds come into January with higher equity exposure and low implied volatility, even a modest selloff could trigger mechanical de-risking. We do not see signs of this at this point.
Crowded long positioning in AI, large-cap growth, or popular factor trades could unwind as investors rebalance, producing outsized drawdowns relative to the macro news.
Calendar, liquidity, and “January effect” dynamics.
A failed or absent “January effect” after investors have pre-positioned for seasonal strength can disappoint expectations and lead to de-risking.
Thin post-holiday liquidity around key data releases, early‑season earnings, or policy headlines can magnify intraday moves and gap risk.
Fund flows and reallocations.
Pension and institutional rebalancing out of equities into now more competitive bonds at the start of the year could be a mechanical seller of stocks.
Mutual fund redemptions or ETF outflows from prior winners (e.g., tech/AI, momentum) as advisors “reset” client allocations could put pressure where leadership has been most extended.
U.S. Economic Releases:
U.S. growth momentum remained strong late in the year, with Q3 real GDP at 4.3% and the Atlanta Fed’s GDPNow tracking Q4 growth near 3.0%, consistent with S&P Global’s Flash PMI signal of roughly 2.5% growth. Looking ahead, the IMF expects global growth of 3.1% in 2026, while U.S. growth is forecast to moderate, ranging from 1.8% to 2.6% across major forecasters, clustering near 2%.
Moderating but still positive growth in 2026 suggests a supportive, though less explosive, backdrop for equities. Slower U.S. expansion near 2% points to more modest earnings growth, favoring quality companies with stable cash flows rather than high-beta cyclicals. Global growth around 3.1% should help multinational revenues, while easing inflation pressures could support valuation multiples. Overall, equity returns are likely to be steadier, narrower, and more selective than in high-growth phases.
The December 2025 FOMC minutes, released yesterday, revealed a “deeply divided” committee that approved a 25-basis-point cut despite inflation concerns. While most favored easing, divisions were stark, with dissenters wanting larger cuts or no change. The Fed signaled a shift to a cautious, data-dependent stance, dampening expectations for rapid future cuts.
Last week’s initial unemployment claims, coming in at 214k vs. 224k expected, was a net positive.
Today’s release of initial unemployment claims at 199k vs. 219k is a net positive.
We’ll be closely monitoring the Final Manufacturing PMI on Friday.
Figure 8: Economic release calendar.
Bottom Line: No change from last week: The U.S. stock market seems to be ending the year on a strong note, driven by resilient corporate earnings, moderating inflation, and expectations of eventual Federal Reserve rate cuts that are supporting valuations, though likely occurring after a pause. Robust consumer spending and strong balance sheets further anchor investor confidence. However, weaknesses persist, with equity valuations remaining elevated relative to historical averages, geopolitical tensions clouding the global outlook, and economic growth could slow under restrictive credit conditions. The market’s optimism will face tests from earnings durability and policy uncertainty into 2026. Based on our indicators and models, we currently remain constructive on U.S. equities.
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.
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 for you.
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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