Day Hagan Catastrophic Stop Update July 7, 2025
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The Day Hagan Catastrophic Stop model is unchanged from last week at 77.27%. The model indicates that investors should maintain their benchmark equity exposure.
Measures evaluating recent breadth thrusts, oversold mean reversion probabilities, investor sentiment, longer-term trends, volume-adjusted supply versus demand, relative stock versus bond trends, credit spreads, and economic activity are supportive. We note that several indicators are positioned to shift to sell signals should upside momentum start to fade.
Figure 1: The Day Hagan Catastrophic Stop model remains constructive for equities longer term.
Technicals
Sentiment remains optimistic. Optimistic sentiment continues to support equity exposure. A reversal below 70 would be negative, indicating that upside demand was starting to fade.
Figure 2: The Day Hagan Daily Market Sentiment Composite.
Last week, we pondered, “Is the S&P 500 overbought?” We wrote that the answer depended on the indicators being evaluated and the time frames in which they were assessed. Using a 14-day RSI for the S&P 500, we posited that equities were more overbought than oversold in the near term but added that there was upside potential relative to previous indicator highs. We concluded that a decisive reversal from current levels would indicate that a near-term consolidation period was likely gaining traction. This remains the case, especially with the RSI (and similar) indicators having moved further into overbought territory.
Figure 3: Short-term measures of overbought/oversold are in overbought territory. We go with the flow until the indicator reaches a peak and reverses.
Supporting the short-term caution (yellow line) vs. long-term constructive (red line) technical view is the chart below, showing the number of S&P 500 stocks above their 50-day MAs at 84.23% while the percentage above their 200-day MAs is 48.81%. The 50-day number is toward the high end of the range (potentially overbought), but the longer-term measure is mid-range.
Figure 4: Short-term breadth indicators overbought, longer-term measures neutral.
The percentage of net new 52-week highs (10-day MA) for the S&P 500 provides a similar message (blue line).
Figure 5: S&P 500 net new 52-week highs reached 58.92% last week.
Investor positioning data indicates that hedge funds have a gross leverage of 97% based on a 5-year horizon and a net leverage of 77% over the same period (source: JPM). Gross leverage highlights the total scale of a fund’s market exposure, which is useful for assessing overall risk and margin requirements. Net leverage focuses on the directional bias (bullish or bearish) after hedges, indicating the fund’s effective market risk. We tend to focus more on net leverage statistics, which are high-neutral.
Figure 6: Similar to the aforementioned net leverage levels, funds targeting 10% volatility have an implied equity allocation of 76.5%, which is also toward the middle of the historical range shown.
The VIX index and realized 30-day S&P 500 volatility are relatively low. A low VIX implies low market volatility, indicating stability. It’s not inherently negative, but it may signal complacency or a potential for sudden spikes.
Figure 7: VIX levels remain low.
Expected Move based on Options Pricing: “The Expected Move, which is also referred to as Implied Move, reflects the price range that a security is expected to move from its current price. The Expected Move is calculated based on 85% of the value of the at-the-money straddle. The range as predicted by the expected move can be used to target high and low prices and is especially useful around earnings season. The chart reflects the prior six months of price activity, followed by the expected move based on the next two weekly and monthly options contracts.” Source: Barchart.
Figure 8: The upper and lower range levels for the July 18 OPEX are 6,176 and 6,383. Note: Projected levels become more meaningful as OPEX approaches.
We continue to feature this chart, showing that earnings forecasts continue to follow the path associated with “No Recession within 12 Months.” Keep in mind, earnings estimates for the Energy sector have been steadily declining. An improvement in the Energy sector’s earnings forecasts would be positive for this particular view of recessionary probabilities. Note: As of March 31, year/year earnings for the Energy sector were expected to be down 8.4%. Currently, the forecast is -25.9% (see the third chart below).
Figure 9: Earnings tracking a no-recession path.
According to FactSet, “110 S&P 500 companies have issued quarterly EPS guidance for the second quarter. Of these companies, 59 have issued negative EPS guidance and 51 have issued positive EPS guidance. The number of companies issuing negative EPS guidance for the second quarter is above the 5-year average of 57 but below the 10-year average of 62. On the other hand, the number of companies issuing positive EPS guidance for the second quarter is above the 5-year average of 42 but above the 10-year average of 39. As a result, the percentage of companies issuing negative EPS guidance for Q2 is 54% (59 out of 110), which is below the 5-year average of 57% and the 10-year average of 61%.”
Figure 10: The percentage of companies providing positive Q2 2025 EPS guidance is normal.
Figure 11: The percentage of companies providing negative Q2 2025 EPS guidance is below the levels seen over the past 12 quarters.
Q2 y/y earnings estimates have ratcheted down from 9.4% on March 31 to just 5.0% as of last week due to major downward revisions in Energy, Consumer Discretionary, Materials, Consumer Staples, Industrials, and Health Care. This may set the market up for potential upside earnings surprises.
Figure 12: Optimistic earnings expectations for the second quarter have been lowered. Analysts expect Q2 y/y growth to be the trough for the next six quarters.
Earnings revisions for the past 13 weeks have been negative, but the severity appears to be waning, with the measure recently bouncing off a low (magenta line below). Was there too much pessimism, and is it now reverting? The next three weeks will be key.
Figure 13: Earnings revisions are still negative, but the downside momentum appears to be slowing. Keep in mind that all this happened while the market was making new highs.
Operating Environment:
Last week, we wrote that “Economic activity, inflation trends, and earnings growth expectations are still supportive, but we continue to expect some consolidation near-term. U.S. equities are not significantly overbought. Positioning among different investor classes is also relatively neutral. We do note, as also detailed last week, that several of our indicators are moving into positions that would allow them to shift to sells should the markets take a turn for the worse. Nonetheless, at this juncture, our models remain positive and confirm that investors maintain their benchmark equity weightings.” We still haven’t seen the consolidation, and our models haven't yet reversed to sell signals. However, given recent gains, increases in positioning, and renewed tariff rhetoric over the weekend, we are still expecting, at the very least, an increase in cross-sector rotation (our recent sector changes are listed at the end of this update).
Figure 14: Most inflation measures continue to generally head lower. The decline in 10-year Treasury bond yield from 4.5% in mid-June to 4.23% at the end of the month partially confirms this view (bonds don’t trade on inflation expectations alone).
Figure 14: Most inflation measures continue to generally head lower. The decline in 10-year Treasury bond yield from 4.5% in mid-June to 4.23% at the end of the month partially confirms this view (bonds don’t trade on inflation expectations alone).
The Atlanta Fed GDPNow real GDP estimate for Q2 2025 is 2.6% annualized growth. The model reflects an uptick in government spending. The Big Beautiful Bill passing is, in our view, positive in the near term, given continued fiscal spending and the removal of uncertainty. Longer-term, regarding inflation and the wisdom of growing the deficit, the answer is still to be determined, but the case for a temporary inflationary impulse is gaining strength.
Figure 16: Q2 earnings calls will be helpful in determining expectations for 2H economic activity.
Upcoming Reports we’ll be watching closely:
Tuesday: NFIB Small Business Index (exp. 98.9), Consumer Credit (exp. 10.6B m/m)
Wednesday: The 90-day reciprocal tariff and 50% EU tariffs pause ends. 10-year bond auction (will foreign investors rebel?). Crude oil inventories (following the OPEC+ increases just announced).
Thursday: Unemployment Claims, 30-year bond auction.
Friday: Federal Budget Balance
Conclusion:
U.S. equities staged a remarkable rally in June, with the S&P 500 surging 4.96% for the month and notching new all-time highs, capping a powerful V-shaped rally that began in April after a turbulent spring. The rebound followed a sharp correction in March and early April, when the S&P 500 plunged more than 21% from its February intraday peak, driven by fears of recession and market turmoil triggered by aggressive tariff policies and geopolitical uncertainty. The administration’s decision to postpone “reciprocal tariffs” for 90 days in April, combined with steady economic data and easing global tensions, was pivotal in reversing sentiment and setting the stage for the rally.
Given the strength of the rally, shorter-term indicators show that U.S. equities are overbought. This makes the market more vulnerable to negative news and may lead to contained, but abrupt, periods of consolidation. However, given the underlying strength evidenced by our major investment models, pullbacks would be viewed as opportunities. Our long-term risk model, the Catastrophic Stop, is registering 77.27% (100 = best), indicating the underlying trends in economic activity, inflation, and earnings are constructive for the markets. In the longer term, corporate earnings are also trending positively, with analysts expecting solid growth through 2026. Recently, however, analysts have reduced their Q2 2025 forecasts to levels that are likely too low, given the abundance of positive corporate dynamics, including a weaker dollar (which is bullish for profits), solid consumer spending, and historically high margins. The net result is that forecasts now indicate that Q2 2025 y/y earnings growth is expected to be the trough level for the next six quarters.
While global headlines (e.g., tariff policy, geopolitical risks) remain unpredictable, we’re focused on the probability of recession. Despite a rise in soft data concerns, such as consumer sentiment, hard economic data continues to support our outlook for moderate expansion. Should our model shift toward a higher risk of contraction, we’ll adjust portfolios accordingly.
With regard to our monthly rebalance, we made the following changes:
Increases:
Financials (upgrade to neutral)
Industrials (upgrade to neutral)
Materials (upgrade to modestly overweight; now ~2.81% vs. 1.90% benchmark weight)
Real Estate (upgrade to neutral)
Decreases:
Communication Services (reduced following significant gains last month)
Information Technology (reduced following significant gains last month)
Consumer Discretionary (to neutral from overweight following significant gains last month)
Consumer Staples (remains modestly overweight, providing defensive characteristics)
Current Sector Positioning
Overweight: Communication Services, Consumer Staples, Materials
Neutral: Consumer Discretionary, Energy, Financials, Health Care, Industrials, Information Technology, Real Estate
Underweight: Utilities
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.
Breadth Thrust – A technical indicator which determines market momentum, signaling the start of a potential new bull market.
CBOE Volatility Index (VIX) – Is a real-time index that represents the market’s expectations for the relative strength of near-term price changes fo the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.
NFIB – The National Federation of Independent Business advocates on behalf of America’s small and independent business owners.
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