Day Hagan Catastrophic Stop Update February 11, 2025
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The Catastrophic Stop model held steady at 72.9%, the same level as last week. On average, the model’s technical indicators remain bullish, and the external indicators are neutral.
Figure 1: Catastrophic Stop Model vs. the S&P 500 Total Return Index
S&P 500 seasonality is expected to remain supportive until mid-February. While not a primary indicator, we may see some softness until early March.
Figure 2: February’s daily seasonality turns negative on February 18, based on the past 30 years of history.
Figure 3: March daily seasonality for the SPX. (It is interesting how the first half of each month looks better than the back half.)
The Cycle Composite for 2025 is encouraging.
Figure 4: S&P 500 Cycle Composite for 2025
From a shorter-term perspective, we monitor High-Yield Bond Breadth for signs that the financial markets are functioning normally (no wild swings). This indicator has provided timely short-term buy signals when the 10-day smoothing falls below -10 and then reversed back above that level. The indicator remains on a buy signal.
Figure 5: Positive high-yield bond breadth is supportive for equities.
Credit spreads are also supportive, remaining narrow by historical standards.
Figure 6: Option-adjusted spreads still narrow for IG Corporates, High Yield, MBS, and Agencies.
Investor sentiment is rated as mildly pessimistic. This is supportive for equities.
Figure 7: Sentiment has reversed from levels denoting extreme pessimism but has not yet reached overly optimistic levels.
One of our favorite research firms is the NFIB Research Foundation, covering trends in small businesses. They release a national survey on the second Tuesday of each month. The recent release is for the survey conducted in January, and the “Key Findings” are as follows:
(link: https://www.nfib.com/news-article/monthly_report/sbet/)
Figure 8: NFIB survey respondents are worried about inflation and finding qualified labor.
The NFIB Chief Economist writes, “Overall, small business owners remain optimistic regarding future business conditions, but uncertainty is on the rise. Hiring challenges continue to frustrate Main Street owners as they struggle to find qualified workers to fill their many open positions. Meanwhile, fewer plan capital investments as they prepare for the months ahead.”
Given that small businesses employ about 46% of the private workforce (62 million workers) and create about 65% of net new private-sector jobs annually, the trends are impactful. We believe the current U.S. economic backdrop shows modest economic growth accompanied by improved inflation trends in the long term. However, if we see CapEx start to wane, it will be a warning sign for economic activity. The Small Business Optimism Index Components table below indicates that even though respondents “Expect the Economy to Improve” and “Now [is] a Good Time to Expand,” “Plans to Make Capital Outlays” are shifting lower.
Figure 9: Small businesses are still optimistic, but concerns may be holding them back from expanding.
Bottom Line: We continue to view the uptrend in U.S. equities as intact. However, our sector allocations are slowly morphing toward more cyclical/defensive sectors. Progress on inflation may be stalling for the time being, and we are keeping an eye on rates to determine whether the change is likely to be impactful longer-term. We note that the 5-year breakeven rate has been trending higher since September last year (shown below).
Figure 10: FRED 5 Year Breakeven Inflation Rate
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 and into 2025, 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 2025 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.
Option Adjusted Spread (OAS) - The measurement of the spread of a fixed-income security rate and the risk-free rate of return (the theoretical rate of return of an investment with zero risk), which is then adjusted to take into account an embedded option.
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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