Day Hagan Catastrophic Stop Update January 7, 2026
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The Day Hagan Catastrophic Stop model held steady at 59.09%. The model continues to indicate that investors should maintain their benchmark equity exposure.
Figure 1: The Catastrophic Stop model would generate a sell signal by closing below 40% for two consecutive days. The current message is positive, indicating investors should maintain benchmark equity exposure.
Below, we list our Top 10 Bullish and Bearish Factors for 2026. Currently, the weight of the evidence leans bullish.
Potential Bullish Surprises:
Continued disinflation allows the Federal Reserve to cut interest rates further.
Lower borrowing costs stimulate housing, consumer spending, and business investment.
Strong productivity gains from AI and automation boost corporate profit margins.
Corporate earnings growth reaccelerates after post-inflation cost pressures fade.
U.S. economic growth outperforms Europe and China, attracting global capital inflows.
Infrastructure and energy transition spending supports the industrial and materials sectors.
Semiconductor and advanced manufacturing reshoring drives domestic capital expenditure.
Labor market remains resilient, supporting steady consumer demand.
Corporate tax or regulatory reforms improve after-tax profitability.
Investor sentiment shifts from risk-off to risk-on, driving valuation multiples higher.
Potential Bearish Surprises:
An economic slowdown or recession reduces revenues and corporate earnings growth.
Inflation reaccelerates, forcing the Federal Reserve to keep rates higher for longer.
Geopolitical conflicts disrupt trade, energy supplies, or global financial stability.
High government debt and deficits push long-term interest rates structurally higher.
Consumer spending weakens as excess savings are depleted and credit stress rises.
Corporate profit margins compress due to rising wages and input costs.
A major financial accident occurs in commercial real estate, banking, or private credit.
Equity valuations remain elevated, limiting upside and increasing downside sensitivity.
China or Europe enters a prolonged recession, it will hurt U.S. exports and multinational earnings.
Political uncertainty or policy shocks increase risk premiums and market volatility. This includes tariffs being deemed illegal (see comments later in this update).
Turning back to the near-term outlook, the Daily Market Sentiment Composite is neutral, having reversed from extreme pessimism. This condition supports the continuation of the current uptrend. Overall, sentiment leans positive but is not at extreme exuberance, which historically is constructive for an ongoing uptrend.
Figure 2: Sentiment is neither overly optimistic nor pessimistic.
Positioning indicators remain essentially unchanged from last week, with equity exposure for algos and systematic traders holding moderately above neutral. Overall, systematic investor positioning is constructive but not stretched.
Figure 3: Positioning moderately above neutral.
From an overbought/oversold perspective, the S&P 500 is currently in a neutral zone. The Nasdaq Composite also remains in neutral territory, showing neither index is extended in either direction. This balanced OBOS condition suggests there is no immediate technical pressure for a reversal in either index.
Figure 4: The S&P 500 is neither overbought nor oversold, based on the 14-day RSI.
The S&P 500 currently exhibits positive gamma, confirmed by significant net positive positioning across major strikes. This environment dampens intraday volatility, keeping price swings contained and supporting market stability. Heading into the new year, this constructive setup provides a favorable backdrop for equities, minimizing the risk of disorderly moves absent unexpected catalysts.
Figure 5: SPX gamma condition is currently favorable. Gamma flips to negative below 6,892.
About Venezuela
Venezuelan bonds soared in early January following Nicolás Maduro's reported capture, with some distressed notes jumping nearly 10 points amid optimism over regime change. Conversely, oil prices spiked the day after capture due to immediate geopolitical uncertainty. Traders priced in short-term risks of sabotage, strikes, and broader global tensions threatening current supply, outweighing the long-term bearish consensus that a post-Maduro Venezuela will eventually flood the market with increased oil exports. That appears to be reversing.
Could Venezuela disrupt the "WTI High $50s" forecast?
Context: WTI oil was expected to stabilize in the high $50s/low $60s. This assumed a steady global supply.
Investment Impact: Venezuela has the world's largest proven reserves but decrepit infrastructure. A surprise "success" in rehabilitating its oil sector could flood the market, pushing oil prices below $50, crushing U.S. shale earnings (e.g., Diamondback, EOG). Alternatively, a total collapse could spike prices.
Key Question: Does Venezuela represent a "supply shock" risk (up or down) that could invalidate the consensus view on stable energy prices? As of this update, the market’s vote is for increased supply.
Can Chevron and U.S. majors rapidly ramp up production?
Context: With Maduro gone, the barrier to U.S. investment falls. Chevron is "ideally positioned" to expand, and service firms (Halliburton/Schlumberger) could return. However, infrastructure is severely degraded.
Investment Impact: If production jumps from <1M bpd to pre-sanctions levels (1.5M+ bpd) by 2027-2030, it creates a bearish "supply glut" for global oil prices, hurting U.S. shale.
Key Question: Will the new government offer the legal guarantees and security needed for U.S. majors to deploy billions in CapEx, or is the security vacuum too dangerous? Currently, there is no clear direction. Our models are currently underweight in the Energy sector.
Crisis Events Normally Don’t Reverse the Primary Trend:
Figure 6: The table, courtesy of NDR, shows that, historically, crisis events have often been opportunities to redeploy capital.
U.S. Economic Releases:
Recent economic data from late 2025 and early 2026 portrays a mixed landscape. Preliminary Q4 2025 GDP surged to 4.3% q/q, significantly beating the 3.3% forecast, supported by a higher-than-expected GDP price index (3.8%), indicating persistent inflationary pressures. However, underlying momentum is uneven; manufacturing activity contracted (ISM Manufacturing PMI fell to 47.9), while the services sector remains resilient, expanding to 54.4 in January. The labor market shows signs of cooling, with ADP employment figures missing expectations and the unemployment rate holding steady at 4.5%. Consumer confidence dipped to 89.1, missing forecasts, while pending home sales saw a surprise jump of 3.3%. Overall, the data suggests robust but uneven growth, with divergent sectoral performance and lingering inflation risks complicating the Fed's path.
Unemployment Claims on Thursday, expected 213k vs. 199k last week.
Employment Report on Friday.
Also, it is expected that SCOTUS will rule on tariffs soon, potentially as early as Friday. Our view is that if the tariffs are deemed illegal by domestic courts, the immediate impact could be a sharp reversal of the "reflationary" trade. Import costs for retailers and manufacturers could plummet, acting as a disinflationary shock that could accelerate Fed rate cuts. Sectors heavily penalized by trade wars—like consumer discretionary, tech hardware, and global shippers—could rally significantly as margin pressures ease. Conversely, domestic-focused small caps and industrial firms protected by the tariffs (e.g., steel, domestic manufacturing) would face a painful repricing as foreign competition returns. Geopolitically, this would likely trigger a chaotic pivot; the administration might attempt to bypass rulings through "national security" executive orders, creating a prolonged period of legal uncertainty that would spike volatility while undermining business investment confidence.
Figure 7: Economic release calendar.
Bottom Line: The U.S. equity market outlook for early 2026 is cautiously optimistic, but we expect higher volatility. Supported by resilient earnings growth (15% est.) and the anticipated end of the "Liberation Day" tariff shocks, stocks are poised for modest gains. However, headwinds persist from sticky inflation, political uncertainty surrounding the Supreme Court's tariff ruling, and concerns about labor cooling. Investors should expect choppy trading, favoring quality sectors. Currently, our models favor the Information Technology, Communication Services, and Consumer Discretionary sectors.
For more details on each sector and current model levels, please visit our research page at https://dayhagan.com/research.
This strategy uses measures of price, valuation, economic trends, liquidity, and market sentiment to make objective, rational, and emotion-free decisions about how much capital to place at risk and where to allocate it.
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 for you.
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
This material is for educational purposes only. Further distribution is prohibited without prior permission. Please see the information on Disclosures here: https://dhfunds.com/literature. Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical.
All Rights Reserved. © Copyright 2026 Day Hagan Asset Management. Data sources: Day Hagan Asset Management, 3Fourteen Research, J.P. Morgan, Goldman Sachs, Barchart, StreetStats, Atlanta Fed, St. Louis Fed, Koyfin, Yardeni, MarketEar, S&P Global, SPDR, FactSet.
Disclosures
S&P 500 Index—An unmanaged composite of 500 large-cap 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. Professional investors widely use this index as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Sentiment – Market sentiment is the prevailing attitude of investors toward a company, a sector, or the financial market.
CBOE Volatility Index (VIX) – A real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from SPX index options with near-term expiration dates, it produces a 30-day forward volatility projection. Volatility, or how quickly prices change, is often seen as a way to gauge market sentiment, particularly the degree of fear among market participants.
OBOS Indicators—The overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price to the trade margin of the given period.
NFIB – The National Federation of Independent Business advocates for America’s small and independent business owners.
Purchasing Manager Indexes (PMIs) – Purchasing Managers’ Indexes are survey-based economic indicators designed to provide timely insight into business conditions.
FOMC Meeting – The FOMC (Federal Open Market Committee) holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-term goals of price stability and sustainable economic growth.
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 prices for a basket of goods and services representative of aggregate U.S. consumer spending.
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This material is intended to provide general market commentary and should not be relied upon as individualized investment advice. Investors should consult with their financial professional before making any investment decisions based on this information.
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