Day Hagan Catastrophic Stop Update January 28, 2025
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The Catastrophic Stop model increased to 72.9% from 65.9% 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 once again improved over the past week due to expanding market breadth, indicating that the uptrend remains intact. Interestingly, 351 S&P 500 stocks advanced on Monday during the “DeepSeek Selloff.”
JPM notes, "For the SOX index, it (Monday’s selloff) was the worst move since March 2020, which took about a month to recoup its March losses. Let’s see how large a catalyst Mag7 earnings can be, but the client mentality yesterday was a lack of panic.”
Figure 2: Earnings estimate revisions were already trending modestly lower (based on the 13-week point change) prior to yesterday’s selloff. Historically (and perhaps surprisingly), semiconductor stocks have performed better when earnings revisions have been weaker, likely due to prices retreating in response to the revisions and ultimately setting up semis for the next rally.
Looking at breadth, even with the selloff, 78.73% of stocks remained above their respective 10-day moving averages.
Figure 3: Breadth held up during Monday’s decline. The percentage of stocks above their 10-day MAs has been 70% or higher since January 15th.
Despite the decline, Information Technology sector ETFs saw inflows yesterday, while utility sector ETFs saw outflows.
Figure 4: More investors bought tech than sold yesterday. There’s still an appetite for tech stocks.
Our Information Technology sector model moved into the 25-50% zone (low-neutral) on 12-18-2024. Since then, the Information Technology sector has underperformed the rest of the 10 sectors by -8.41%.
Figure 5: We remain modestly below the S&P 500 benchmark weighting for the Information Technology sector. When the model moves back above 50%, we will add exposure.
We note that “fear indicators” like OAS (option-adjusted spreads) and CDS (credit default swaps) didn’t reflect undue concern. In other words, investors didn’t price in a high probability of market contagion. (The 5-year Treasury auction was good yesterday, the 2-year was less so, but both attested to the continued demand for U.S. financial assets.)
Figure 6: Credit spreads continue to portray a calm financial backdrop.
Interestingly, some very short-term “breadth thrust” indicators have recently triggered buy signals as the number of advancing stocks outpace decliners. For example, James Stack’s 5-day NYSE A/D indicator generated a buy signal on 1-21-2025.
Figure 7: Again, breadth is better than might be expected after Monday’s declines in the S&P 500 and NASDAQ.
We’re keeping in mind that the U.S. economy is improving, inflation is trending in the right direction, and the Fed is past peak hawkishness.
Figure 8: Investors still expecting Fed funds to have a 3-handle in 6- to 12-months. Lower interest rates are needed to support the current multiple.
Also, earnings growth for the non-MAG7 is expected to trend higher into the end of the year, which is a net positive.
Figure 9: The “rest” of the stock market will likely contribute more to earnings as the year progresses.
U.S. economic growth is OK, inflation trends are OK, and earnings trends are OK. China is trying to stimulate its economy, and the rest of the world, on average, is supported by positive economic growth. The net result is that our models continue to rate the uptrend as intact. (As of this writing, the S&P 500 is about 1% off its all-time high.)
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.
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.
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.
Credit Default Swap (CDS) – Is a financial derivative that allows an investor to swap or offset their credit risk with that of another investor. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse them if the borrower defaults.
Breadth Thrust – A technical indicator which determines market momentum, signaling the start of a potential new bull market.
MAG7 – A group of seven high-performing and influential stocks in the technology sector.
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There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
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