Day Hagan Catastrophic Stop Update January 21, 2025


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The Catastrophic Stop model increased slightly to 65.7% from 60.7% last week. Internal measures (price-related indicators) are bullish, and External measures (indicators calling the operating environment) are neutral.

Figure 1: The Catastrophic Stop model improved over the past week due to expanding market breadth, indicating that the uptrend remains intact.

When considering the near term, we typically focus on the following factors: Sentiment, OBOS (overbought/oversold), Breadth, Positioning, Seasonality, and the market's Gamma Condition. Our indicators’ messages are as follows:

Sentiment: Sentiment levels are neutral, meaning investors likely aren’t overly exposed long or short. Equities have historically gained when this condition has existed but at below-trend rates. We note that the AAII survey of individual investors shows a lower percentage of bullish investors, with levels approaching what was seen in Fall 2023, just before the October squeeze higher. Interestingly, hedge fund sentiment has also reversed from excessive optimism to neutral over the past month.

Figure 2: Short-term sentiment indicators are rated neutral. A reversal back above 40% in the indicator below would be bullish, indicating that optimism is seeping back into the markets.

AAII bearish sentiment is 40.6%, the highest level since November 2, 2023 (50.28%), when the equity market was near its lows.

Figure 3: Retail investors are the most bearish they’ve been since November 2023, according to the AAII poll below.

Overbought/Oversold: Near-term, equities are now slightly overbought, reversing from the oversold conditions mentioned last week. Nonetheless, several sectors remain relatively oversold, including Information Technology and Materials, as shown below.

Figure 4: The Information Technology sector is modestly oversold on a short-term basis. A reversal back above the lower SD bracket would be positive.

Figure 5: The Materials sector is reversing from a short-term oversold low.

Breadth: Only two sectors, Energy and Information Technology, show over half of their constituents above their respective 50-day moving averages. Real Estate has the lowest percentage, at just 10.9% of constituents above their 50-day MAs, with Consumer staples at 23.0%. While we mentioned that breadth is starting to broaden, it has a long way to go before we would consider it over-extended.

Figure 6: S&P 500 Growth and Value breadth trends (based on the A/D line with a 21-day smoothing) look similar.

Positioning: Hedge funds, CTAs, and Long/Short investors are slowly reducing gross and net leverage. The chart below shows the CoT data for large speculator longs minus shorts as a percentage of open interest on equity futures. The time series have just moved into the neutral zone, indicating that HF positioning is being reduced. We’re looking for an extreme to be reached and then a reversal to show that sellers are exhausted.

Figure 7: Hedge funds are not as extended as they were, but still at somewhat high levels.

Seasonality: Seasonality indicators are second-tier indicators in our view. They can be somewhat informative but take a back seat to more impactful factors like equity and fixed income trends, supported by our model readings. Nonetheless, we do keep abreast of the messages that seasonality provides.

Figure 8: The S&P 500 Cycle Composite indicates potential weakness from mid-February until early April. Stay tuned.

Gamma Condition (of the SPY): We monitor the equity market's gamma condition to determine whether dealers are net long or net short deltas. In other words, if the Gamma Condition is positive, we would expect less volatility. If it is negative, we would expect more volatility. For those who would like to follow this measure, I’ve highlighted the barchart.com charts below.

Figure 9: The market's Gamma Condition is currently positive. Therefore, we expect slightly lower volatility.

Figure 9: The market's Gamma Condition is currently positive. Therefore, we expect slightly lower volatility.

Overall, the models and indicators indicate that the uptrend remains intact. In future missives, we’ll discuss the indicators and models that define our intermediate and longer-term outlooks.

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 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.

S&P 500® Growth - Measures constituents from the S&P 500 that are classified as growth stocks based on three factors: sales growth, the ratio of earnings change to price, and momentum.

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.

S&P 500 Materials - Comprises those companies included in the S&P 500 that are classified as members of the GICS® materials sector.

GICS® - Is an industry analysis framework that helps investors understand the key business activities for companies around the world. MSCI and S&P Dow Jones Indices developed this classification standard to provide investors with consistent and exhaustive industry definitions.

Gamma - is an options risk metric that describes the rate of change in an option's delta per one-point move in the underlying asset's price. Delta is how much an option's premium (price) will change given a one-point move in the underlying asset's price. Therefore, gamma is a measure of how the rate of change of an option's price will change with fluctuations in the underlying price. The higher the gamma, the more volatile the price of the option is.

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
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