Day Hagan Catastrophic Stop Update February 18, 2025
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The Catastrophic Stop model held steady at 72.9%, the same level as last week. The model’s technical indicators are bullish, and the external indicators are neutral.
Figure 1: Catastrophic Stop Model vs. the S&P 500 Total Return Index
Recent inflation reports have been coming in a little hotter than expected. The CPI rose by 0.5% from the previous month, marking the most significant increase since August 2023. This brings the annual inflation rate to 3.0%, up from 2.9% in December 2024. Notable contributors include a 0.4% rise in shelter costs and a 0.4% increase in food prices, with egg prices surging by 15.2% due to an avian flu outbreak. The PPI increased by 0.4% month-over-month and 3.5% year-over-year, surpassing forecasts. Core PPI, excluding food and energy, rose by 0.3% monthly and exceeded yearly expectations. These figures suggest persistent inflationary pressures at the wholesale level.
We note that seasonal adjustments likely played a heavy role in the results. For example, in their most recent report, 3Fourteen Research shows that used car prices added 6.5 bps to the core CPI’s 45-bps increase, mainly attributable to a seasonal adjustment.
Figure 2: U.S. inflation data is still sticky, but seasonal adjustments likely goosed the numbers higher. The chart below illustrates January changes in used car prices, subtracting the not seasonally adjusted from the seasonally adjusted. The result shows the impact of the seasonal adjustments.
The NDR Inflation Timing Model shows that the net result of 22 inflation indicators is a neutral inflation outlook.
Figure 3: Inflation pressures are still present but not expected to surge.
We expect shelter inflation to diminish (shelter inflation has lagging tendencies). Interestingly, lodging away from home (accounting for only about 1% of CPI) jumped 1.4% month over month—likely the result of folks finding somewhere to live following the spate of natural disasters we’ve seen already this year. This may already be self-correcting, as Liz Ann Sonders notes that the “U.S. rental vacancy rate from @ApartmentList has now surpassed the July 2020 peak (6.85%).”
Figure 4: Shelter inflation (including OER) accounts for about 35% of headline CPI and 40% of Core CPI. We expect lower shelter costs over the course of the year.
We’re keeping a close eye on commodity trends. Currently, 12 of 19 are above their 200-day moving averages, while just 10 have rising 200-day moving averages. Historically, this has been bullish for commodity prices, but it isn’t as extreme as what we experienced following the pandemic supply shock. While some front-end purchasing may be occurring as tariff uncertainties persist, our view is that inflation isn’t likely to spike higher and, as Chair Powell recently stated, is likely to resume the path toward 2%.
Figure 5: Commodity breadth isn’t pointing to a spike in prices but is still likely firmer than the Fed would like to see.
Based on the Atlanta Fed GDPNow forecast for Q1 2025, U.S. economic growth is expected to be around 2.3%. The St. Louis Fed’s Economic News Index Real GDP Nowcast shows 2.11% expected. Both project trend-level growth for the U.S. economy, which has historically been constructive for equities.
Figure 6: Atlanta Fed GDPNow forecast.
Historically, neutral inflation with economic growth rising has been positive for equities. Moreover, should inflation move into a “rising” mode, equities have still gained, albeit at a lower rate on average, since 1972.
Figure 7: As long as economic growth remains stable or expanding, we aren’t expecting a significant equity drawdown at this point.
Bottom Line: We continue to view the uptrend in U.S. equities as intact. However, our sector allocations have been modestly shifting 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 in the long term.
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.
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 pcires for a basket of goods and services representative of aggregate U.S. consumer spending.
Producer Price Inflation (PPI) – Measures the average change over time in the prices domestic producers receive for their output. It is a measure of inflation at the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and product category.
Owners’ Equivalent Rent (OER) – Is the amount of rent that would have to be paid in order to substitute a currently owned house as a rental property. It figures the amount of monthly rent that would be equivalent to the monthly expenses of owning a property (e.g. mortgage, taxes, etc.).
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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