Day Hagan Catastrophic Stop Update June 10, 2025
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The Catastrophic Stop model declined to 68.18% from 77.27% last week. The model indicates that investors should maintain their benchmark equity exposure.
The lower model reading is due to the high-yield bond breadth factor softening over the last week and shifting from bullish to neutral. Measures of Breadth Thrust, Oversold Mean Reversion, Sentiment, Volume-adjusted Supply/Demand, Stock/Bond relative strength, High-Yield Credit Spreads (OAS), and Baltic Dry Index rate trends remain positive.
Figure 1: The Catastrophic Stop model signals a fully invested equity position (relative to the benchmark). Note: The June 2025 Smart Sector with Catastrophic Stop monthly letter is available at https://dayhagan.com/research/day-hagan-smart-sector-strategy-update-june-3-2025.
Technicals
Sentiment: The Day Hagan Daily Market Sentiment Composite has reached levels of extreme optimism and is showing signs of reversing. As detailed last week, this is not unusual after significant equity market declines; historically, the model has often shown extreme pessimism that quickly transitions into excessive optimism. We interpret this rapid movement similarly to a “breadth thrust.” With sentiment indicators, we go with the flow until it reaches an extreme and reverses. In other words, we will rate this indicator as neutral until it reverses back below 70.
Figure 2: Sentiment “thrusts” after significant declines are normal.
Overbought/Oversold: The percentage of S&P 500 stocks above their 10-day moving averages (teal) is 66%. This is below the ~90% level typically seen at short-term tops, indicating that potential upside remains. Longer-term, just 52% of stocks are above their respective 200-day MAs (purple), which is neutral.
Figure 3: The percentage of S&P 500 stocks trading above their 200-day MAs shows markets are not significantly overbought, but the 10-day indicates some near-term consolidation potential.
Overbought/Oversold: Interestingly, only 3.18% of S&P 500 stocks are trading at new 52-week highs. There are two ways to look at this (at least): 1) this shows a divergence; fewer stocks making new highs as the index moves higher, or 2) there is still room to the upside before significant overbought conditions are in place. Our view is that there is room to the upside, but our breadth indicators need to show some confirmation trends soon.
Figure 4: Just 3.18% of SPY constituents are trading at new 52-week highs.
Volatility: The percentage of S&P 500 stocks with IV above their 1-year averages is also neutral. Note that market peaks have tended to coincide with levels below 20%. (Market lows have tended to occur with this time series around 90% or so.)
Figure 5: The reversal in volatility measures following the April lows appears to have room to run.
Systematic and Algo Traders: Based on the 3Fourteen chart below, funds targeting 10% volatility (annually) are still underweight stocks, but less so than last week. Like the previous charts shown, there is room to the upside before the indicator shifts negative.
Figure 6: Several investment allocation categories have increased their equity allocations but are not yet overweight.
Fixed Income: High-yield credit spreads (option-adjusted spreads) have normalized, indicating that markets are functioning normally.
Figure 7: Narrower credit spreads are currently supportive for equities.
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 June 20 OPEX are 5,938 and 6,117.
Operating Environment
Earnings: We’ve been following the chart below for the last several updates. As you can see, the trend in forward 12-month earnings has shifted higher and now appears to be tracking the non-recession earnings path. This is consistent with the announcements from several wire houses downgrading the probability of a recession in 2025. S&P 500 earnings growth for 2026 is forecast to be +13.1%. The Forward P/E, based on 2026 estimates, is 20.3x.
Keep in mind that a weaker U.S. dollar generally boosts S&P 500 earnings, with around 40% of the index's revenues received from overseas. (In 2023, as the dollar slid 2%, earnings growth expectations increased by ~7%.)
Figure 9: Equity markets generally follow earnings trends. We noted a couple of weeks ago that Q2 earnings expectations were relatively low, potentially providing an upside surprise. This view appears to still be in play.
Liquidity: The year/year growth in M2 (NSA) is 4.3% (through May 5) and has been trending higher. This is constructive for markets as increasing the money supply can help support higher valuations, especially in growth stocks, as liquidity fuels investment and spending. Our view is that companies are likely delaying projects and investments until the smoke clears from tariff rhetoric and geopolitical risks. As those weights are lifted, there is fodder to support another move higher (increasing economic liquidity + pent-up demand).
Figure 10: Economic liquidity has been improving. So far, it doesn’t appear inflationary.
Inflation: We track commodity prices for signs of inflation. As shown below, the PPI for Final Demand has declined to 2.4% y/y through April. The index measures average price changes for goods, services, and construction sold for personal consumption, investment, and export. The PPI for Final demand tracks over 3,700 commodity price indexes for goods and about 800 for services.
Figure 11: Inflation statistics continue to move in the right direction (lower).
Small Business: The NFIB Small Business Optimism Index increased in May (released today), beating expectations. It improved by 3 points and is now above the 51-year average. Note that components calling “Expect the Economy to Improve,” “Expect Real Sales Higher,” and “Current Inventory (too low)” improved the most. Earnings trends were most negative. Keep in mind that Small Businesses (fewer than 500 employees) plus Independent Business Owners account for 45.9% of the private workforce (about 59 million people), and about 43.5% of U.S. GDP.
Figure 12: Small businesses are becoming more optimistic.
Consumer: Consumer Credit increased $17.9 billion in April versus expectations of just $10.85 billion. Revolving credit increased at an annualized rate of 7%, signaling solid consumer spending.
Figure 13: Total U.S. Consumer Credit shows consumers are still spending.
Upcoming Reports we’ll be watching closely:
Wednesday: CPI (exp. +0.2 m/m, +2.5% y/y, Core m/m exp. +0.3%), 10-year Bond Auction, Federal Budget Balance (exp. -314.3B)
Thursday: PPI (exp. +0.2 m/m, Core m/m exp. +0.3%), Unemployment Claims (exp. 242k, keep in mind the employment report last Friday was better than expected)
Friday: Preliminary UoM Consumer Sentiment and Expectations (not a great indicator, but worth monitoring for large changes)
Conclusion: Economic activity, inflation trends, and earnings growth expectations are supportive. U.S. equities are not significantly overbought, though there is less upside than a week ago. 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.
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.
Baltic Dry Index Factor - Is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel. The Baltic Dry Index is a composite of four sub-indices that measure different sizes of dry bulk carriers or merchant ships: Capesize, Panamax, Supramax, and Handysize.
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.
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.
Producer Price Inflation (PPI) – Measures the average change over time in the prices domestic producers receive for their output. It is a measure of inflation at the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and product category.
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.
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