Day Hagan Catastrophic Stop Update July 28, 2025
A downloadable PDF copy of the Article:
The Day Hagan Catastrophic Stop model level is 77.27% as of today’s open, unchanged from last week. The model indicates that investors should maintain their benchmark equity exposure.
Figure 1: DH Catastrophic Stop Model.
Several factors within the Catastrophic Stop model are poised to generate sell signals should conditions deteriorate. The indicator below tracks High-Yield option-adjusted spread trends. A reversal above the zero threshold would be concerning.
Figure 2: Fixed income markets continue to function well, but low risk premiums and tight spreads don’t leave much room for error.
Demand for equity exposure continues to outpace supply. The trend is currently our friend.
Figure 3: Volume-adjusted demand for Russell 3000 remains constructive.
Short-term overbought conditions and excessively optimistic sentiment levels are still prevalent. Given such, we continue to expect a short period of consolidation. Nonetheless, given the level of the Catastrophic Stop model, we are not anticipating a major decline.
Figure 4: Given the strength of the rally off the April low, many shorter-term measures of OBOS are registering overbought.
The DH Daily Market Sentiment Composite is registering levels of extreme optimism and has pulled back ever so slightly. A decline below 70 would be a concern.
Figure 5: DH Daily Market Sentiment Composite
S&P 500 volatility (VIX) is near the lowest level since February, confirming the Sentiment Composite’s signal of minimal market fear. Nonetheless, the Skew Index has been steadily increasing since the April 21st low, indicating increased tail risk concerns, yet the value is still well below what was observed in February. In other words, the VIX’s message is one of general complacency, while the Skew index indicates that investors are slowly starting to add hedges.
Figure 6: Another view of volatility is 3Fourteen’s “Percent of stocks with implied volatility above their 1-year averages.” The indicator is currently hovering around the middle of the range.
Positioning is getting more extended, as one would expect in an uptrend. The question is whether or not positioning is overly extreme. We’re getting mixed messages. DB notes that “systematic strategies are [continuing] ramping up exposure,” while GS shows “US Fundamental Long/Short net leverage at 52.4%, which is the 51st percentile on a 3-year lookback.” However, as discussed last week, momentum and high-beta strategies are fully invested. The net result is that extreme levels of positioning have not been reached in aggregate, suggesting potential upside.
Figure 7: Vol targeting funds nearing full exposure based on a 5-year lookback.
Seasonality is likely to become a mild headwind until late September, early October.
Figure 8: S&P 500 Seasonal Cycle Composite.
Strategists now forecast an average of 6,276 for year-end 2025, below the current S&P 500 print. If this week’s economic data meets or exceeds expectations, we would expect forecasts to be revised upward.
Figure 9: S&P 500 vs year-end strategist forecasts.
About one-third of the S&P 500 reports earnings this week. As we suspected, S&P 500 year-over-year earnings growth forecasts have continued to increase, now up from 4.9% on June 30, 5.9% last week, and 6.4% as of Friday. The 12-month Earnings Growth Model below indicates that earnings are expected to grow by approximately 5.85% over the next 12 months, based on a blend of macroeconomic conditions, financial conditions, and analyst estimates.
Figure 10: Q2 y/y earnings growth is expected to be the low for this year and into the first half of 2026. Note that buybacks will resume in large part next week.
The S&P 500 Valuation Heatmap below indicates that if the forward earnings forecast increases by 5% and interest rates decrease by 50 bps (for the real 5-year interest rates), then the projected level for the S&P 500 would be 6,754. At this point, this appears to be a reasonable expectation.
(The Heatmap uses a two-stage DCF for S&P 500 valuation, with a five-year growth phase and a terminal stable growth phase. The 5-Year Treasury yield sets the risk-free rate for initial cash flows, while the 5-Year Forward 5-Year Yield covers years 6–10. Inflation expectations from the Cleveland Fed adjust real growth rates to nominal rates, isolating the impact of inflation. Source: StreetStats.)
Figure 11: Continued earnings growth and the potential for lower rates are constructive in the longer term.
Along with the onslaught of earnings reports to be released this week are several important economic updates. Note that expectations are for Q2 GDP annualized growth around 2.4%, no rate cut from the FOMC, personal income and spending to turn positive (m/m), unemployment claims coming in around 222k (currently down for five successive weeks), an increase in average hourly earnings to 0.3% m/m, non-farm payrolls increasing 108k (government jobs shrinking), and the final manufacturing PMI to come in at 49.5 (lots of discussion around how manufacturing is relatively weak). Not shown is the Quarterly Refunding Announcement, which will be released on Wednesday.
ISM Manufacturing Prices will also be scrutinized, given the tariff backdrop. A decline to the expected 66.5 would be welcomed by investors.
Figure 12: Economic release calendar for the week. Plenty of economic and inflation data.
Conclusion:
Excessive optimism and short-term overbought conditions persist. So far, the markets have looked past the potential headwinds. We expect a period of consolidation, which could take the form of a sideways market or a minor pullback, both of which we would consider healthy for the longer-term uptrend. Our longer-term indicators remain constructive.
For more details on each sector and current model levels, please visit our research page at https://dayhagan.com/research
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, rational, and unemotional decisions about how much capital to place at risk and where to allocate 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 time that is convenient for you.
I hope you have a wonderful week,
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 and Fact Sheets 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 2025 Day Hagan Asset Management.)
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.
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.
Russell 3000 Value Index - Is a market-capitalization weighted equity index maintained by the Russell Investment Group and based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform by including only value stocks.
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.
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.
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
Websites: https://dayhagan.com or https://dhfunds.com
© 2025 Day Hagan Asset Management
