Day Hagan Catastrophic Stop Update July 21, 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 allocation.
Figure 1: A decline below 40% for two consecutive days would generate a risk-off signal for the S&P 500.
The Day Hagan Daily Market Sentiment Composite is currently neutral, but the path matters. At 53.59 on July 17, it sits almost exactly in the middle of its 0–100 range.
Over the past few months, however, sentiment has been anything but consistently neutral:
It fell to extreme pessimism during the spring market decline.
It then surged above 80 as stocks recovered, signaling excessive optimism.
More recently, it retreated to roughly ~37 before rebounding to 53.59.
That rebound suggests fear has eased, but enthusiasm has not returned to an extreme. Because the composite has already moved materially off its recent low, it no longer provides the contrarian opportunity that would accompany a drop below 30 followed by a reversal higher.
Other short-term gauges are somewhat more bullish:
AAII: Bullish sentiment jumped 8.6 percentage points to 44.9% for the week ended July 16. Bearish sentiment fell to 32.9%, while neutral sentiment dropped to 22.2%. The bull-bear spread is therefore +12 percentage points. Individual investors are moderately optimistic, not euphoric.
VIX: The VIX reached an intraday 19.50 on July 17, its highest level in three weeks. That indicates greater near-term anxiety, particularly around technology, AI positioning and geopolitical risk, but not panic-level fear.
Institutional sentiment: Bank of America’s July Fund Manager Survey showed cash allocations falling to 3.6% and investor optimism reaching its highest level since February. The unusually low cash level triggered BofA’s contrarian sell signal.
Bottom line: The Day Hagan composite says overall sentiment is neutral and improving. AAII and institutional positioning are more optimistic, while the VIX reflects renewed short-term caution. Taken together, sentiment is mixed to moderately bullish, with neither the widespread fear associated with a strong contrarian buy signal nor uniform euphoria—although low institutional cash suggests less room for disappointment.
Figure 2: Investor sentiment is neutral overall.
U.S. credit conditions remain supportive for equities. Investment-grade OAS are not signaling systemic stress. Nonetheless, tight levels leave less cushion if growth or liquidity conditions weaken materially.
Figure 3: OAS not signaling systemic stress. CDS trends confirm (not shown).
Breadth remains constructive.
Figure 4: Market breadth is improving.
Both charts show that long-term trends remain positive, but near-term momentum has cooled. The S&P 500 is essentially sitting on its 50-day average and remains well above its rising 200-day average. Its 14-day RSI of 59.0 indicates moderately positive momentum. The Nasdaq is below its 50-day average, but above its 200-day average, while its 52.9 RSI is neutral. Shorter-term RSI readings are recovering, suggesting selling pressure has eased without either index becoming overbought at this point yet.
Figure 5: RSIs near overbought levels, but not there yet.
Figure 6: Similar message from the Nasdaq RSI.
Systematic investors remain cautious despite the S&P 500’s advance. Volatility-targeting equity exposure is near its five-year average, well below the crowded levels reached earlier this year. DBMF’s S&P 500 exposure has also fallen sharply, from nearly 40% to 15.7%. Together, the charts suggest quantitative strategies are reducing risk rather than chasing the rally. That could create a near-term headwind, but their relatively light positioning also leaves room for buying if volatility falls and market trends strengthen.
Figure 7: Vol-targeting funds’ exposure is neutral.
DBMF is our proxy for quant strategies, and the message is that they are reducing exposure.
Figure 8: Positioning indicators remain mixed.
Earnings revisions remain broadly positive. The S&P 500’s 12-month forward earnings estimate is up 9.9% over the latest 63-day period, ranking in the 98th historical percentile. Technology and Communication Services retain the strongest revision levels, although both have recently flattened. Industrials, Consumer Discretionary and Financials are improving, indicating that earnings strength is broadening beyond technology. Conversely, Energy revisions have fallen sharply from their June peak, while Materials continue to deteriorate. Real Estate and Utilities are stable, and Staples and Health Care remain comparatively subdued. Overall, the level is exceptionally strong, but momentum beneath the index is becoming more mixed.
Figure 9: Earnings growth rate expectations slowing, but still relatively positive.
Forward earnings growth recently slipped below 10%, signaling slower earnings momentum but not necessarily an immediate market decline. Historically, stocks continued rising over the following six months, but 12-month returns were nearly flat, and drawdowns were larger than normal. Because only a few prior examples exist, the indicator should be viewed as a caution flag rather than a sell signal, pointing to potentially greater medium-term market vulnerability.
Figure 10: A decline in three-month forward earnings growth from above 10% to below 10% has not historically been an immediate sell signal. Average S&P 500 returns remained positive over the next one, three, and six months, including a 9.7% six-month average gain. However, 12-month returns averaged only 0.2%, versus 10.2% normally, while maximum drawdowns averaged 21%, compared with 14% historically. The June 16 and July 10 crossings have been followed by declines of 0.7% and 1.6%, respectively. With only three completed 12-month observations, the signal suggests slowing earnings momentum and greater medium-term vulnerability, not a definitive bearish forecast.
The Magnificent Seven’s forward P/E has fallen sharply to 24.7, reducing—but not eliminating—its valuation premium. Large caps remain relatively expensive at 20.1 times earnings, while midcaps and small caps trade near 16 times. The gap suggests smaller companies offer better relative value, although stronger earnings growth may justify part of mega-cap technology’s premium.
Figure 11: Valuations have improved, but large-cap remains elevated based on next 12-month earnings expectations.
The Magnificent Seven and large caps remain expensive relative to mid- and small-cap stocks, although their premiums have narrowed. Meanwhile, the S&P 500’s historically low 0.80 PEG ratio suggests valuations appear attractive relative to projected long-term earnings growth. The message is cautiously constructive, but it depends heavily on optimistic growth forecasts being achieved, especially as near-term earnings momentum is slowing.
Figure 12: Valuations holding up rests on earnings expectations being achieved.
The WTI curve has shifted higher over the past month, with near-term crude rising to roughly $82 per barrel from $78. The steep backwardation, including a $12.26 spread between the first and twentieth contracts, signals tight prompt supplies and a sizable premium for immediately available oil. However, long-dated prices remain near $70, suggesting markets expect today’s supply pressure or geopolitical risk premium to ease over time rather than become permanent.
Figure 13: Energy prices becoming a problem again.
Seasonal factors imply a choppy market into October. Don’t forget about midterm pressures.
Figure 14: Updated S&P 500 cycle composite for 2026 and 2027.
The FOMC meets July 28–29, with markets expecting no immediate policy change. CME FedWatch futures imply roughly an 86% probability of holding rates steady, a 14% chance of a quarter-point hike, and virtually no chance of a cut. The chart reinforces this hawkish bias. The two-year Treasury yield stands about 55 basis points above the federal funds rate, suggesting bond investors expect tighter policy ahead as inflation remains elevated.
Figure 15: No change expected on Wednesday. But the markets are implying it will be a closer call than most expect.
U.S. Economic Releases:
Last week’s data portrayed an economy still expanding, but unevenly. Manufacturing surveys strengthened, housing starts rebounded, sentiment improved, and jobless claims fell, indicating a firm labor market. Retail sales rose modestly, while housing confidence and pending sales remained weak. Inflation cooled sharply, though import prices and inflation expectations remain concerns.
Corporate America also appears healthy, with early second-quarter earnings and revenues growing strongly, although results remain concentrated among large technology companies.
This week, we’ll be focused on Unemployment Claims on Thursday and the Flash PMIs on Friday.
Figure 16: Economic release calendar. Source: Forexfactory.com
Bottom Line: The Catastrophic Stop model remains at 59.09%, supporting benchmark equity exposure. Sentiment is neutral overall, although improving individual optimism and low institutional cash warrant some caution. Credit conditions and market breadth remain constructive, while long-term equity trends are positive despite softer near-term momentum. Systematic strategies have reduced exposure, leaving potential buying power if volatility falls. Earnings revisions remain strong but are becoming more mixed, and forward growth has slipped below 10%. Valuations have improved, though large-cap premiums still depend on earnings delivery. Rising near-term oil prices, seasonal weakness, and tighter policy expectations are key risks. Economic data indicate continued, uneven growth, cooling inflation, firm employment, and generally healthy corporate earnings.
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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.
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Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
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S&P 500 Index—An unmanaged composite of 500 large-cap companies, 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.
Russell 3000: The Russell 3000 Index measures the performance of approximately 3,000 of the largest U.S. publicly traded companies, representing about 98% of the investable U.S. equity market.
AAII Sentiment Survey — A weekly survey measuring whether individual investors expect stocks to rise, fall, or remain unchanged over the next six months.
Backwardation — A futures-market structure in which near-term commodity prices exceed longer-dated prices, often indicating tight current supplies.
Benchmark Equity Allocation — The normal percentage of a portfolio assigned to stocks based on its investment objective and risk profile.
Breadth — The degree to which market gains or losses are shared across individual stocks. Broad participation generally strengthens a market trend.
Bull-Bear Spread — The percentage of bullish investors minus the percentage of bearish investors.
Catastrophic Stop Model — Day Hagan’s risk-management model designed to identify periods when major market deterioration may warrant reducing equity exposure.
CDS, or Credit Default Swap — A market-based measure of the perceived risk that a borrower will default. Rising CDS costs generally indicate increasing credit concern.
Contrarian Buy Signal — A signal suggesting widespread pessimism may have become excessive, potentially creating a buying opportunity.
Contrarian Sell Signal — A warning that optimism, risk-taking, or positioning may have become excessive, increasing vulnerability to disappointment.
Daily Market Sentiment Composite — Day Hagan’s 0–100 measure combining multiple indicators of investor psychology. Readings below 30 indicate excessive pessimism, while readings above 70 indicate excessive optimism.
DBMF — The iMGP DBi Managed Futures Strategy ETF, used here as a proxy for positioning among systematic, trend-following strategies.
Drawdown — The percentage decline from an investment’s previous peak to its subsequent low.
Earnings Revisions — Changes analysts make to company profit estimates. Rising estimates are generally supportive of stock prices.
Federal Funds Rate — The Federal Reserve’s primary short-term policy interest rate.
FOMC — The Federal Open Market Committee, the Federal Reserve group responsible for setting monetary policy and interest rates.
Forward Earnings — Analysts’ estimates of company profits over a future period, commonly the next 12 months.
Forward Earnings Growth Rate — The expected percentage increase in future corporate earnings compared with the prior comparable period.
Forward P/E Ratio — A stock’s price divided by expected earnings over the next 12 months. Higher readings generally indicate more demanding valuations.
Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
Maximum Drawdown — The largest peak-to-trough decline experienced during a specified period.
OAS, or Option-Adjusted Spread — The additional yield a bond provides over a comparable Treasury after adjusting for embedded options. Wider spreads generally indicate greater perceived credit risk.
Overbought — A condition in which prices have risen rapidly and may be vulnerable to a pause or pullback.
Oversold — A condition in which prices have fallen rapidly and may be positioned for a rebound.
PEG Ratio — The price-to-earnings ratio divided by expected long-term earnings growth. A lower ratio may indicate a more attractive valuation relative to anticipated growth.
Risk-Off Signal — An indication that market conditions have deteriorated enough to favor reducing exposure to riskier assets.
RSI, or Relative Strength Index — A momentum indicator ranging from 0 to 100. Readings above 70 commonly indicate overbought conditions, while readings below 30 indicate oversold conditions.
Systematic Investors — Strategies that adjust exposure using predefined rules based on trends, volatility, momentum, or other quantitative signals.
VIX — A market-based measure of expected S&P 500 volatility over the next 30 days, sometimes called the market’s fear gauge.
Volatility-Targeting Strategy — A rules-based strategy that generally reduces equity exposure when volatility rises and increases exposure when volatility falls.
WTI — West Texas Intermediate, a major U.S. crude-oil pricing benchmark.
WTI Forward Curve — The series of prices for WTI crude-oil futures across different expiration dates, reflecting supply, demand, storage, and market expectations.
Communication Services sector: The Communication Services Sector includes telecom and media & entertainment companies, including producers of interactive gaming products and companies engaged in content and information creation or distribution through proprietary platforms.
Consumer Discretionary sector: The Consumer Discretionary sector's manufacturing segment includes automobiles & components, household durable goods, leisure products, and textiles & apparel. The services segment includes hotels, restaurants, and other leisure facilities. It also includes distributors and retailers of consumer discretionary products.
Consumer Staples sector: The Consumer Staples sector includes manufacturers and distributors of food, beverages, and tobacco, as well as producers of non-durable household goods and personal products. It also includes distributors and retailers of consumer staples, including food & drug retailers.
Energy sector: The Energy sector includes companies that operate in exploration & production, refining & marketing, and storage & transportation of oil & gas, as well as coal & consumable fuels. It also includes companies that offer oil & gas equipment and services.
Financials sector: The Financials sector encompasses banking, financial services, consumer finance, capital markets, and insurance. It also includes Financial Exchanges & Data and Mortgage REITs.
Fixed Income sector: The Fixed Income sector includes investment securities that pay investors fixed interest payments until maturity. Designed for income generation and capital preservation, this sector includes government, corporate, and municipal bonds, as well as certificates of deposit (CDs).
Health Care sector: The Health Care sector includes health care providers & services, health care equipment & supplies, and health care technology companies. It also includes companies involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.
Industrials sector: The Industrials sector includes aerospace & defense, building products, electrical equipment, machinery, and companies that offer construction & engineering services. It also includes providers of commercial & professional services, including printing, environmental & facilities services, office services & supplies, security & alarm services, human resources & employment services, and research & consulting services. It also includes companies that provide transportation services.
Information Technology sector: The Information Technology sector includes software and information technology services, manufacturers and distributors of technology hardware & equipment, such as communications equipment, cellular phones, computers & peripherals, electronic equipment and related instruments, and semiconductors and related equipment & materials.
Materials sector: The Materials sector includes chemicals, construction materials, forest products, glass, paper and related packaging products, and metals, minerals, and mining companies, including steel producers.
Real Estate sector: The Real Estate sector includes companies engaged in real estate development and operation. It also includes companies offering real estate-related services and Equity Real Estate Investment Trusts (REITs).
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