Day Hagan Catastrophic Stop Update January 14, 2025
A downloadable PDF copy of the Article:
The Catastrophic Stop model declined to 60.7% from 67.9% last week as the MSCI ACWI Breadth Factor reverted to a sell signal. The Internal Composite is bullish, and the External Composite is neutral.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return
We wrote a couple of weeks ago, “The model correctly recommended a fully invested position for all of 2024. It was especially helpful during the July 16th to August 5th period, when the S&P 500 stalled due to the Japan carry trade unwind (the BoJ raised policy rates and the yen appreciated), concerns around U.S. economic growth (the Citi Economic Surprise Index was negative), concerns around AI profitability vs. Capex levels, over-optimism, systematic and algo traders being fully invested (on a net and gross basis), the reversal of the short-covering rally that lead into the July peak, gamma shifting from positive to negative (creating a higher vol environment), and election uncertainty.”
Given the yen’s appreciation vs. the U.S. dollar over the past three sessions, we wanted to revisit the yen carry trade. The move was primarily due to BoJ Deputy Governor Himino’s comments about the rising probability of a rate hike at next week’s BoJ meeting. If a hike occurs, this could, in practice, disrupt the carry trade again, reducing demand for U.S. assets. Note that once the July 2024 hike was completed and positioning adjusted, the primary trend of the S&P 500 resumed. (The BoJ also hiked rates earlier in March 2024, when they ended NIRP.)
Figure 2: If the BoJ decides to hike again, we would expect some market weakness near-term until the new information is absorbed into positioning.
The markets are also dealing with the blackout period for stock buybacks in anticipation of earnings releases, creating another headwind. This, too, shall pass, but for right now, the markets don’t have the benefit of that demand source. (Apparently, the 1% excise tax on share repurchases starting in 2023 hasn’t hindered volumes.)
Figure 3: Buybacks are a source of demand that wanes before every earnings season and then resumes as earnings are released.
Regarding economic data, we continue to view economic activity as moderate but growing. The Citigroup Economic Surprise Index is back at levels indicating that data has been beating average consensus over the past three months. This is bullish.
Figure 4: Economic data supports a “moderate growth” expectation.
Sentiment was overly optimistic back in July 2024. That has reversed back to levels denoting pessimism.
Figure 5: Sentiment is now a near-term tailwind. An increase back above 40 would be bullish.
Markets are also oversold based on several shorter-term indicators.
Figure 6: OBOS indicators are supportive for the near term.
Bottom Line: Last week’s update listed the bullish and bearish factors we think will be most impactful for Q1 2025. These continue to be in place.
Bullish (positive):
Fed is past peak hawkishness – it’s only been 3 ½ months since the first rate cut!
Most global central banks are also lowering rates
Employment is strong in the U.S.
Economic growth is positive in the U.S.
Corporate earnings growth (profitability) is solid
Inflation is trending lower
The U.S. and global service economy is expanding
Credit spreads remain below long-term averages (indicates lower risk of a major financial dislocation)
Potential for a more business-friendly tax and regulatory environment
AI theme remains attractive
Economic liquidity is positive, including consumer and business lending outlets
Bearish (negative):
Valuations
Interest rates have risen since the first rate cut
Lower-income consumers under pressure
Election risk – any unintended consequences of the new administration’s efforts to streamline government
U.S. Fiscal policy is a wildcard (can make the argument that changes could be inflationary or disinflationary). Markets tend to price uncertainty negatively.
Rates higher for longer (real yields increasing as inflation retreats)
The strong U.S. dollar is a headwind for U.S. export industries (we expect the dollar to weaken)
Economic weakness in Europe (France and Germany GDP)
Sovereign debt levels
Japanese yen-based carry trade under pressure
Manufacturing still weak in the U.S. and across the globe
China’s growth prospects are being dialed down
Our longer-term models remain supportive, with U.S. equities near all-time highs. Several major models continue to evidence initial signs of weakness but not enough to cause us to turn negative on equities. At this juncture, 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 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.
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.
OBOS Indicators – Overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price with the trade margin of the given period.
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.
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trail, Sarasota, FL 34236
Toll-Free: (800) 594-7930
Office Phone: (941) 330-1702
Websites: https://dayhagan.com or https://dhfunds.com
© 2024 Day Hagan Asset Management
