Day Hagan Catastrophic Stop Update July 7, 2026
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The Day Hagan Catastrophic Stop model declined to 59.09% as the Stock/Bond Relative Trend Factor turned negative. 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 moved slightly lower to 36.43%, down from 39.16% last week. Overall, the model suggests that investor sentiment is neither overly bullish nor overly bearish.
Figure 2: In the near term, sentiment is approaching levels indicating excessive pessimism. A decline below 30, followed by a reversal back above that level, would generate a new buy signal for equities.
Our July 2026 monthly updates for Smart Sector with Catastrophic Stop, Smart Sector Fixed Income, and Smart Sector International are now available at DayHagan.com/Research. For the Smart Sector strategy, this month’s model updates highlighted the following:
Consumer Discretionary: Underweight. The model is not rejecting the consumer, but the model is softening. Retail sales looked strong, yet gasoline and nominal price effects did much of the lifting. With weak sentiment, high inflation expectations, and rate-sensitive durables still exposed, we believe exposure should favor affluent-consumer, digital, travel, and recurring-revenue firms.
Consumer Staples: Underweight. Defensive characteristics are useful, but the model is finding too little leadership, too little revision power, and too much pricing fatigue. Food inflation can support reported sales, yet it also raises the risk of trade-down. Favor category leaders with clean balance sheets and pricing discipline, not broad defensive exposure.
Communication Services: Underweight. The problem is not quality; it is concentration and weakening confirmation. Mega-cap platforms still generate cash flow, but model signals have deteriorated as valuation, advertising cyclicality, yield-curve sensitivity, and AI-spending skepticism have become heavier offsets.
Energy: Neutral. The sector is supported by relative strength, breadth, rig count, crude supply, and spot price signals, but event risk cuts both ways. The oil shock helped revenues, yet WTI’s retreat below $70 shows how quickly war premium can disappear. Neutral keeps the inflation hedge without overcommitting.
Financials: Underweight. Valuation is attractive, and loan growth, momentum, the dollar, and economic surprises help, but the broader model leans negative. Credit conditions, financial spreads, volatility, drawdown, forward earnings yield, and the yield curve remain headwinds. Favor diversified fee income, insurers, exchanges, and data businesses.
Health Care: Neutral. The model is no longer one-sided, as relative momentum, reversals, sector trend, drawdown improvement, and book yield turned supportive. Policy, reimbursement, utilization, and earnings dispersion remain risks, but tactical improvement justifies benchmark exposure. We favor GLP-1, specialty pharma, tools, devices, and visible product cycles.
Industrials: Overweight. The improvement is meaningful because the model now has support from relative momentum, price trend, fewer new lows, cash-flow yield, industrial production, and oil sensitivity. Stronger manufacturing and AI-related power infrastructure make aerospace, defense, grid equipment, automation, and reshoring beneficiaries more compelling.
Information Technology: Overweight. The bar is higher. AI infrastructure, semiconductors, memory, cloud, networking, cybersecurity, and profitable software remain the market’s strongest earnings engine. Higher inflation and a 10-year rate near 4.42% punish long-duration stories, so the allocation should emphasize revenue conversion, free cash flow, and valuation discipline.
Materials: Underweight, unchanged. Manufacturing improvement helps, especially for chemicals, packaging, metals, copper, electrification inputs, and specialty materials, but the model still lacks broad confirmation. Relative price trends, momentum, copper, silver, gold, earnings yield, energy costs, the dollar, and uneven global demand keep the sector below benchmark weight.
Real Estate: Neutral. The model is balanced enough to avoid an underweight, but not strong enough to chase. Breadth and some macro inputs improved, while rates, homebuilding, price trend, and small-business credit remain challenges. We favor data centers, industrial logistics, necessity retail, and well-capitalized REITs with contractual growth.
Utilities: Overweight. This is no longer only a defensive yield call. Relative moving averages, reversals, momentum, capacity utilization, and dividend yield support the model, while AI data centers, electrification, grid hardening, and regulated spending support fundamentals. Higher rates remain the risk, but earnings visibility and power demand justify exposure.
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 systematic stress. CDS trends confirm (not shown).
Breadth remains constructive.
Figure 4: Market breadth is improving.
The S&P 500 remains in an uptrend above its 50- and 200-day averages. The RSI recently improved, suggesting momentum is normalizing rather than breaking down.
Figure 5: Froth faded, trend intact, breadth supportive.
Figure 6: Similar message from the Nasdaq RSI.
Positioning is mixed, with overall levels suggesting a neutral view. However, volatility-targeting funds' exposure is below average and is approaching levels last seen during the late-March lows.
Figure 7: Vol-targeting funds’ exposure appears light.
DBMF’s calculated S&P 500 exposure is a proxy for the U.S. equity positioning of trend-following and managed futures funds. It’s still relatively high (based on the 5-year range), but has pulled back to levels indicating less exposure.
Figure 8: Positioning indicators remain mixed.
This chart shows earnings revisions remain a major support for equities, but leadership is uneven. The S&P 500’s 63-day forward EPS revisions are up 10.3% YTD, in the 99th percentile historically. Technology, Communication Services, Industrials, Energy, Materials, Consumer Discretionary, and Real Estate are all elevated. That suggests analysts are still raising estimates across many economically important sectors. The caution is that Energy and Materials have rolled over, while Staples, Health Care, and Financials are much less impressive.
Figure 9: Earnings remain the key.
We continue to view valuations as mixed. Forward P/E ratios remain above long-term averages, suggesting the market is not cheap on traditional earnings multiples. However, the PEG ratio appears more attractive at roughly 0.79, as expected earnings growth has outpaced the forward P/E. That makes valuations look more reasonable if profit forecasts are achieved. Other measures, including narrow credit spreads, strong revisions, and elevated margins, support current prices, but leave less room for disappointment.
Figure 10: Valuations holding up rests on earnings expectations being achieved.
WTI continues to reprice lower (dark blue line).
Figure 11: Lower energy prices aren’t likely to meaningfully impact broader index earnings expectations.
Keep in mind that sector drawdowns have become more uneven. Energy is the clear laggard, still near its worst drawdown at roughly -15%. Technology, Communication Services, and Utilities also remain meaningfully below prior peaks. In contrast, Health Care is back near a high, while Industrials, Financials, and Real Estate have recovered sharply. Overall, breadth has improved, but leadership remains selective, with cyclical and defensive groups sending mixed messages.
Figure 12: Rotation.
Figure 13: Updated S&P 500 cycle composite for 2026 and 2027.
U.S. Economic Releases:
Last week’s U.S. data suggested activity remains expansionary, inflation pressure cooled at the margin, and the corporate operating backdrop is still constructive but becoming more selective.
The manufacturing data were not weak. Both PMIs remained solidly above 50, with the ISM Manufacturing PMI at 53.3 and the final Manufacturing PMI at 53.9. That points to continued expansion, even though the pace moderated slightly versus expectations and prior readings. Chicago PMI at 56.7 reinforced the idea that industrial activity is still growing.
The more important signal may have been inflation. ISM Manufacturing Prices fell sharply to 73.0 from 82.1, remaining elevated but directionally favorable. Combined with average hourly earnings at 0.3%, the data suggest price and wage pressures are no longer accelerating.
For companies, that is a decent mix: demand is still expanding, input-cost pressure eased, and labor costs were contained. The main caution is the softer consumer confidence and slower payroll growth, which argue for selectivity rather than broad macro alarm.
This week, we’ll be focused on Services PMIs, jobless claims, trade balance, bond auctions, consumer credit, and FOMC minutes for clues on growth, labor softness, Treasury demand, consumer behavior, and Fed policy direction.
Figure 14: Economic release calendar. Source: Forexfactory.com
Bottom Line: The Day Hagan indicators remain constructive, but have narrowed over the past month. The Catastrophic Stop model held at 59.09%, supporting benchmark equity exposure, while sentiment slipped to 36.43% and is nearing excessive-pessimism levels that could trigger a new buy signal if reversed. Sector models favor Industrials, Technology, and Utilities, while several consumer, financial, materials, and communication areas remain underweight. Credit spreads, market breadth, trend measures, and earnings revisions continue to support equities, though valuations depend on achieving profit forecasts. Positioning is mixed, with some exposure measures light. Economic data still point to expansion, easing inflation pressure, and a constructive, but narrower, corporate backdrop.
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.
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Sources:
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 model histories; 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
Disclosure: The information contained herein is provided for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. The securities, instruments, or strategies described may not be suitable for all investors, and their value and income may fluctuate. Past performance is not indicative of future results, and there is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. Investing involves risks, including loss of principal.
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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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.
Sentiment – Market sentiment is the prevailing attitude of investors toward a company, a sector, or the financial market.
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.
Purchasing Manager Indexes (PMIs) – survey-based economic indicators that provide timely insight into business conditions.
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.
OAS: OAS spreads are the extra yield a bond offers over Treasuries, after adjusting for embedded options, used to gauge credit risk and relative value.
Catastrophic Stop model — Proprietary model used to indicate suggested equity exposure levels.
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.
PPI: PPI, or the Producer Price Index, tracks average price changes producers receive for goods and services, offering an early signal of inflationary pressure.
PCE: Personal Consumption Expenditures measures prices paid by U.S. consumers across goods and services, serving as the Federal Reserve’s preferred broad inflation gauge.
Supercore PCE: Supercore PCE tracks services inflation, excluding energy and housing, helping policymakers assess underlying wage-sensitive price pressures that are less distorted by volatile categories.
DBMF: DBMF is an actively managed futures ETF that aims to mirror hedge fund trend-following strategies by using long and short futures positions across stocks, bonds, currencies, and commodities.
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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