Day Hagan Catastrophic Stop Update July 15, 2024
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Catastrophic Stop Update
The Catastrophic Stop model declined to 77.9% from 82.9% last week. The Internal and External composites are bullish.
Figure 1: The Catastrophic Stop model remains positive.
The composite model’s recent decline resulted from the Sentiment Composite moving from neutral levels into excessive optimism territory, which historically has been a near-term headwind. Should the model eclipse 85% (moving further into the excess optimism zone and around the levels where previous rallies stalled), we would view the probability of a dip/correction as significantly higher.
Figure 2: Sentiment back in the Excessive Optimism zone.
Looking at the last 17 "First Rate Cuts" through the lens of earnings growth and multiple valuations, we note that multiples have tended to expand (green line) while earnings growth was mixed, if not subdued (red line). The net result, historically, was an uptrend in stocks (blue line). But, with multiples already at the high end of the historical range, multiple expansion may not be able to save the day. It's up to earnings. (Note: The S&P 500 Forward P/E is 21.4x, vs. the 10-year average of 17.9x.)
Figure 3: Multiple expansion has historically driven market gains after First Rate Cuts, increasing an average of 28.15%. Conversely, earnings have declined an average of -9.32% in the year following a First Rate Cut.
FactSet shows that only the Utilities and Energy sectors have current Forward P/Es below their 10-year averages (which includes 2020, when multiples spiked as earnings collapsed, inflating the average P/E during that period).
Figure 4: S&P 500 sector Forward P/Es.
The chart below illustrates the spike higher for Forward P/E multiples during 2020 as earnings declined. If one normalizes that period, the current Forward P/E would be at the top of the 10-year range.
Figure 5: The S&P 500 isn’t cheap.
Earnings growth needs to come through. Below are current expectations.
Figure 6: Earnings growth expectations are elevated for 2024 and 2025. This requires the U.S. and global economy to continue to grow.
Of course, rate cuts would help. Currently, the market is pricing in about three rate cuts for 2024 (dark blue line).
Figure 7: Three rate cuts are now priced in for 2024, though the third cut has a probability of just above 50%. Next FOMC meetings: July 31 and September 18.
From a macro perspective, inflationary pressures are still diminishing, and U.S. economic growth is still good.
Figure 8: Inflationary pressures are abating.
Figure 9: U.S. economic growth is still positive and supportive of continued earnings growth
Bottom Line: 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, 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 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 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.
FOMC Meeting – The FOMC (Federal Open Market Committee) 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.
Fed Fund futures curve – Fed Fund futures contracts are based on the federal funds rate and traded on the Chicago Mercantile Exchange (CME). Fed Funds futures are often used by banks and portfolio managers with the goal of hedging against inflation in a short-term market. The future curve is the graphical representation of the relationship between the price of forward contracts and the time to maturity of the contracts.
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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