Day Hagan Catastrophic Stop Update July 9, 2024
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Catastrophic Stop Update
The Catastrophic Stop model increased to 82.9% from 77.9% last week. The Internal and External composites are bullish.
Figure 1: The Catastrophic Stop model remains positive
Positive contributors to the model’s reading are Stock/Bond Relative Strength, Short-Term Trend, Intermediate-Term Trend, Breadth, Volume-adjusted Supply/Demand, Option-Adjusted Credit Spreads, Economic Activity, High-Yield and Emerging Market Bond Breadth. Measures evaluating Breadth Thrusts and Oversold Mean Reversion (intense selling) conditions are neutral, given that the signals only trigger buys at major market bottoms and are neutral otherwise. Lastly, Sentiment is also neutral.
We note that several indicators are near inflection points, meaning that they are poised to generate sell signals should market conditions deteriorate. For example, although High-Yield Option-Adjusted spreads are at the low end of the 20-year range, there have been some slight signs of widening.
Figure 2: Credit spreads are OK, but we’re watching closely as they have recently ticked higher.
Figure 3: Positive breadth readings are evident within the High-Yield and Emerging-Market bond categories. A reversal to negative breadth and continued widening of OAS (shown above) would be a concern, causing the Catastrophic Stop model level to decline.
Figure 4: Sentiment remains neutral.
The lack of volatility has also been in the news. NDR notes, "The S&P 500 is in its 11th-longest stretch without a 2% down day since 1928. The end of previous long streaks has been followed by mixed returns, but not the end of the bull market, on average.” The table below illustrates previous occurrences and the subsequent market returns. Results tend to be mixed but, on average, similar to all other periods.
Figure 5: After one year without a 2% down day, the subsequent S&P 500 returns are mixed but lean positive.
Turning to the macro, we are keeping an eye on the Global Recession Probability Model, which has turned higher, albeit from very low levels. In our view, the recent move up (signaling potentially weaker global economic activity) accurately depicts the struggles many economies worldwide have in spurring growth. The model uses the Composite Leading Indicators for 35 countries.
Figure 6: Figure 6: Global economic growth is OK, but some cracks are starting to appear. For example, Japan and Germany's annual GDP growth rates were negative through Q1 (both -0.2%), while the U.K. was just +0.3%, Euro Area +0.4%, and Canada +0.5%. The U.S. was +2.9%, China +5.3%, India +7.8%. A move above 30 would signal caution.
Lastly, heading into Chairman Powell’s testimony today, the current Fed Funds futures curve (based on investor positioning) illustrates the expectations for a series of rate cuts over the next 12 months (dark blue line). This starkly contrasts expectations from one year ago (light blue line) when rate hikes were priced in for another four months from today. And it’s a little less dovish than what was indicated just six months ago (orange line). Our view: As long as rate cuts aren’t being enacted due to a rapidly slowing economy, the Fed’s expected path to rate normalization is a bullish underpinning.
Figure 7: Rate cuts expected. The number and timing are still up in the air. We view the Fed as being past peak hawkishness, and that’s positive.
Figure 8: Whether the rate cut cycle ends up being a “fast” or “slow” cycle, the first few months after the first cut have been positive. (Internally, we’ve been discussing if this would be the catalyst for a blow-off top.)
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
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trl
Sarasota, FL 34236
Toll Free: (800) 594-7930
Office Phone: (941) 330-1702
Website: https://dayhagan.com or https://dhfunds.com
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.
Breadth Thrust – A technical indicator which determines market momentum, signaling the start of a potential new bull market.
Oversold Mean Reversion factors – Mean reversion trading strategies use technical indicators to identify when assets are oversold or overbought, which can signal a potential return to average prices.
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.
Credit spread – The difference between two debt securities with different credit ratings but similar maturities. It is a common way to measure how much of a premium an investor might receive for taking on more risk.
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.
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
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