Day Hagan Catastrophic Stop Update February 25, 2025
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The Day Hagan Catastrophic Stop model level is 72.9%, the same level as last week. The model’s internal indicators remain bullish, and the external indicators are neutral. We note that measures calling U.S. Stock/Bond relative strength and Short-term Trend are approaching potential sell signals, while MSCI Equity Market breadth and Emerging Market/High-Yield bond breadth remain positive. The Oversold Mean Reversion Factor hasn’t reached significant oversold levels, sentiment is neutral, and U.S. economic activity, while slowing, remains positive. The weight of the evidence result is that the current pullback (the S&P 500 is down -3.62% from its all-time high as of this writing) is within the bounds of a normal correction at this time. If our indicators determine that the decline is likely to be more pervasive, we will quickly increase our cash position.
Figure 1: Catastrophic Stop Model vs. the S&P 500 Total Return Index
Importantly, measures calling potential financial market disruptions are holding up well, including credit spreads for U.S. IG Corporates, High Yield, MBS, and Agencies (OAS = option-adjusted spreads).
Figure 2: A spike in credit spreads would be problematic. Currently, spreads are still relatively narrow.
The MAGS complex has been under pressure and is collectively down for the year (over -5.2% YTD, -12.5% from the 52-week high). Note: We entered 2025 with a neutral allocation to the Information Technology sector and reduced to an underweight at the beginning of February.
Figure 3: The Information Technology model bounced off the 25% level, avoiding moving into the bearish zone. A move above 50% would be bullish, and a move below 25% would be bearish.
For perspective, the MAG 7 Relative Forward P/E Ratio is near the lowest level since late 2016.
Figure 4: MAG 7 Relative Forward P/E Ratio
Refinitiv (via MarketEar) shows that the MAG index is sitting right on the 100-day moving average. A break below would likely lead to technical selling. However, a break below and a reversal would signal that support (demand) is returning to the former market leaders.
Figure 5: Rotation continues out of the MAGS. However, essential levels are nearby that may lead to reversion.
DB (via MarketEar) also notes that Tech positioning is still elevated. Interestingly, in early 2022, positioning was very light, yet Tech stocks struggled. In 2020, Tech's positioning was at its highest level since 2009, yet Tech dominated. The point is this information is best used as a second-tier input, similar to seasonality. Currently, the measure is a negative overhang for tech, but ultimately, our model drives our allocation.
Figure 6: Tech positioning elevated.
When reviewing short-term OBOS indicators, we note that the NYSE is overbought, the SP500 is approaching oversold (it will likely hit it if the market closes around current levels), and the DJIA is oversold.
Figure 7: Not yet oversold across the board.
Sentiment is back to Extreme Pessimism levels. This is constructive. A reversal back through 40 would be bullish.
Figure 8: Short-term Sentiment has just turned pessimistic. Now, we need to see a reversal showing that sellers are washed out.
If the S&P 500 Momentum Reversal indicator shifts to a Neutral signal, it will negate the current buy signal generated on January 16th.
Figure 9: Monitoring for a new momentum neutral or buy signal
The 6-month Implied Forward Treasury Bill rate implies 30 basis points of potential easing over the next six months.
Figure 10: The Fed is not “hawkish,” with a likely easing and discussions around slowing the balance sheet runoff. While not as hopeful as a year ago, it’s essential to remember that the Fed currently provides more of a tailwind than a headwind.
Bottom Line: The quantitative, unemotional outlook confirms that economic growth is decelerating but still positive overall. Inflation pressures are rated neutral. The situation is fluid, to say the least. As our indicators shift, we will adjust the portfolio accordingly, up or down. Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. Currently, the uptrend remains intact. As has been the case for all of 2024 and into 2025, 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 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.
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.
MAG7 – A group of seven high-performing and influential stocks in the technology sector.
Price-to-earnings (P/E) ratio – A valuation metric that compares a company’s stock price to its earnings per share (EPS) to determine if a stock is expensive or cheap. It’s calculated by dividing the current stock price by the EPS, which is calculated by dividing the last 12 months of earnings by the weighted average shares outstanding.
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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