Day Hagan Catastrophic Stop Update June 17, 2025
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The Day Hagan Catastrophic Stop model held steady at 68.18%, the same level as last week. The model indicates that investors should maintain their benchmark equity exposure.
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. We note that several indicators are moving closer to neutral (from bullish), which in turn, positions them to generate sell signals more quickly should market trends turn decisively negative.
Figure 1: The Catastrophic Stop model signals a fully invested equity position (relative to the benchmark).
Technicals
Sentiment: The Day Hagan Daily Market Sentiment Composite has reached levels of extreme optimism and is showing signs of reversing. 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: A decline below 70 would indicate that near-term headwinds are increasing.
Systematic and Algo Traders: JP Morgan notes that Gross Leverage among all strategies and equity long/short funds is back to “the highest levels we’ve seen.” Equity quants remain more neutral but have increased exposure significantly over the past eight weeks. Net leverage is neutral (TPM chart second below). Based on the 3Fourteen chart directly below, funds targeting 10% volatility (annually) are now sporting a more neutral stock exposure. The net result is that this cadre of investors is no longer a strong source of demand, but there is still room to the upside based on net exposures.
Figure 3: Several investment allocation categories have chased and are becoming more fully invested, yet there is still upside potential.
Positioning: JP Morgan’s TPM (Tactical Positioning Monitor) is neutral. Note that the TPM can remain above +1 SD or more for long stretches of time, so a run up to those levels doesn’t immediately imply a sell signal. Like sentiment, with positioning we “go with the flow until it reaches an extreme and reverses.”
Figure 4: Overall positioning neutral.
Positioning: Smart Money Confidence is providing a similar message: Risks rising, but not yet at sell levels. And even when the sell threshold is breached, it can be very early.
Figure 5: Smart Money Confidence is less bullish, but not (yet) on a sell.
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 6: The upper and lower range levels for the June 20 OPEX are 5,954 and 6,080.
Gamma: SPX option pricing indicates negative gamma today (more volatility), slightly positive tomorrow, and large positive gamma for OPEX on 6-20.
Figure 7: The positive gamma condition of the market for Friday indicates potentially lower volatility. Of course, with the market’s being closed Thursday, this becomes a little more muddled.
Seasonality: Based on the last 15 years, July has been a pretty good month for the S&P 500; up 86.67% of the time, average gain of 2.86%, and the largest decline of just -2.15%. August and September have historically been dicier. (Source: Barchart)
Figure 8: Heading into July, S&P 500 seasonality is a tailwind.
Technical and Fundamental: We view the chart below as an intersection between technical and fundamental. When S&P 500 12-month earnings expectations are near all-time highs, it has been positive for equity returns. In fact, since 1990, when the forward 12-month EPS estimates are within 1% of ATH, the market has outperformed Buy/Hold, the max drawdown has been reduced significantly, and the Sharpe ratio improved.
Figure 9: Yes, earning expectations have been moving lower, but even with the decline, forward EPS estimates are near the all-time high. This has historically been a bullish underpinning for equities.
Operating Environment
Earnings: This chart has been central to our views around economic activity, as earnings trends have historically helped capture information regarding future economic activity. We’ve been following the chart below for the last several updates. As you can see, the trend in forward 12-month earnings has again shifted higher and is 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 +13.7% (up from 13.1% last week). The Forward P/E, based on 2026 estimates, is 20.1x.
Figure 10: Equity markets generally follow earnings trends.
The Fed: The Fed is expected to hold rates steady tomorrow. However, the overarching trend is for lower rates. We continue to view the Fed as “past peak hawkishness.” This is relatively constructive for equities.
Figure 11: Rate cut probabilities indicate 3 to 4 rate cuts over the next 18 months. The Fed’s Dot-Plot averages imply Fed Funds Target Rates of 3.875% for 2025, 3.375% for 2026, and 3.125 for 2027. Long-run expectations are for 3.0%.
Valuations: The table below summarizes expected S&P 500 performance sensitivity given myriad earnings and interest rate changes. For example, if interest rates (real 5-year interest rate) shift lower by 50 bps and forward earnings estimates increased by 5%, then one would expect the S&P 500 to increase by 5.6%. (10-year Treasury currently at 4.40%, just above the 50-day MA at 4.39%.)
Figure 12: The table below provides a potential scorecard for different interest rate and earnings growth relationships. (Similar to two-stage 5-year DCF framework. Source: StreetStats.)
Negative Earnings revisions breadth may have troughed. On March 31, FactSet wrote that Q2 2025 S&P 500 earnings growth expectations were for 9.3% y/y. It’s now declined to 4.9%. For Q3 2025 y/y growth, estimates are for 7.2%, and Q4 is 6.2%.
Figure 13: Q1 earnings were much better than expected. Can Q2 do as well? So far, no. However, Q2 is seemingly being viewed by the Street as the “trough quarter” for earnings growth.
As you can see below, the Energy sector is the main culprit behind the earnings estimate reductions (though Industrials, Staples, Materials, and Discretionary are also detrimental). The recent spike in crude will likely increase expectations for energy sector earnings. We’ll be monitoring revisions and upcoming reports for signs this is the trough.
Figure 14: Earnings are still growing but the rate of change has been slowing. This, along with the blackout period for buybacks coming up, may be more of a headwind until Q2 earnings season is out of the way.
Earnings growth expectations for 2026 remain constructive. If interest rates hold steady or move lower and 2026 earnings expectations hold around current levels, the Valuation Heatmap shown earlier (Figure 12) indicates that gains should follow.
Figure 15: Earnings growth expectations for 2026 are bullish.
Lastly, economic growth is still positive and Q2 looks to be quite positive given the pre-tariff ordering patterns. We rate economic growth as modest, though today’s Retail Sale report was a clear miss (m/m decline of 0.9% and April revised down to -0.1%). Industrial Production has also been showing signs that purchasers are tentative even with the tariff pause still in effect. We are also keeping an eye on the Citi Economic Surprise Index for the U.S., which is slightly negative.
Inflation is a bit more of a concern after the recent spike in crude oil prices. WTI Crude has increased from $57.15 on 5/5/2025 to $71.83 today, an increase of 25.68%. Energy prices are about 8% of the CPI basket. Crude oil is just one component of retail energy costs (refining, distribution, taxes also play roles.) This could be a problem if prices don’t retreat soon. We’re not clear whether investors will look through high CPI/PPI/PCE prints unless energy prices are in retreat when the next CPI report is released. Note: WTI prices are back to levels seen on April 2.
Figure 16: Economic activity is holding up but concerns around inflation re-accelerating are growing due to energy prices ratcheting up.
Upcoming Reports we’ll be watching closely:
Wednesday: FOMC, Unemployment Claims (exp. 246k), Building Permits (exp. 1.42m), TIC report (exp. $142.4B)
Friday: OPEX results
Conclusion: 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.
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.
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.
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.
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.
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