Day Hagan Catastrophic Stop Update June 24, 2025
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The Day Hagan Catastrophic Stop model increased to 77.27% from 66.18% last week. The model indicates that investors should maintain their benchmark equity exposure.
Figure 1: The Day Hagan Catastrophic Stop model remains constructive for equities.
The model’s increase resulted from a longer-term technical indicator turning positive. As you can see on the signal chart below, this indicator is designed to be trend-following, tasked with providing signals that define longer-term supply and demand leadership. It’s also important to note that the indicator is sitting just above the signal threshold. In other words, if the markets should lose upside momentum, this indicator is poised to reverse back to a sell signal.
Figure 2: Longer-term trend indicators shifting more positively.
Technicals
Sentiment remains optimistic. A reversal below 70 would be negative, indicating that upside demand was starting to fade. We note that investor positioning remains largely unchanged from last week, with a neutral stance.
Figure 3: Optimistic sentiment continues to support equity exposure.
Oil futures spiked as U.S. strikes on Iranian nuclear facilities escalated Middle East tensions. Brent crude rose ~4% to $78, and WTI climbed ~3% to $76 after Iran's parliament voted to close the Strait of Hormuz, a critical chokepoint for 20% of global oil. Markets factored in a geopolitical risk premium, with traders anticipating further volatility if escalation disrupts supply. Forecasts warn of significant price upside if the strait is shut down. At this point, our view is that the strait will remain open simply because China would bear the brunt of the closure. China is known to have influence within Iran. China receives over 90% of Iran’s oil exports (about 1 to 1.5 million barrels per day), and a shutdown of the strait could impact close to 10% of China’s imports.
Figure 4: The Crude Oil ETF Volatility Index moved higher on the Iran news, but peak levels did not break out past what was observed in 2016, 2020, and late-2021 to 2022. Crude oil implied volatility (based on option pricing) indicates that investors are assigning a lower probability to the persistence of higher crude prices.
The Energy sector model shows that the recent increase in energy stock prices (which was much lower than the gains in the commodity) wasn’t enough to flip the model to bullish, given the technical and economic backdrops. Measures of overbought/oversold, decline in rig counts, and the weaker U.S. dollar are positive. However, subpar relative strength, an increase in rolling 5-month volatility, narrow sector breadth, a declining longer-term trend, declining cash flow momentum, inventories, and term premium are negative. (Estimates are that the war risk premium for WTI is about $6 per barrel in the front month.)
Figure 5: The Energy Sector Composite model remains cautious on the sector.
Last week, we noted that inflation is a greater concern following the recent spike in crude oil prices. WTI Crude increased from $57.15 on 5/5/2025 to $71.83 last week (an increase of 25.68%) and is now back down to $64.82 at the time of this writing. Energy prices are about 8% of the CPI basket. Crude oil is just one component of retail energy costs (refining, distribution, and taxes also play roles). We wrote, “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.” Well, prices are trending lower. Note: WTI prices are back to levels seen in May 2021 (as global economic activity stalled).
Figure 6: The 5-year breakeven inflation rate moved from 2.30% on June 11 to just 2.33% yesterday, indicating that investors are not (yet) overly concerned about recent energy price increases translating into an inflation spike.
Seasonality is becoming a tailwind. July has typically been strong for the S&P 500 (see last week’s Update for more details).
Figure 7: Seasonal influences are nearing a positive inflection point, potentially offsetting some of the negativity around the buyback blackout period in place for the next few weeks.
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 5,938 and 6,229.
Operating Environment for Equities
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 operating earnings growth for 2026 is forecast to be +13.3%. The Forward P/E, based on 2026 estimates, is 20.2x. (The forward P/Es for the S&P Citigroup Growth and Value indexes are 24.8x and 16.7x, respectively.)
Figure 9: Equity markets generally follow earnings trends.
Economic policy uncertainty continues to diminish. Interestingly, before April 2’s “Liberation Day,” U.S. real GDP growth was expected to come in at a 2.0% annualized rate. On “Liberation Day,” forecasts were revised down to just 0.4% growth. After the 90-day pause was announced on April 11, forecasts were increased to 0.8%. After the May 12th U.S./China agreement, it was back to 1.0%. As of June, the Fed is projecting a 1.4% rate. (Data through June 23.)
Figure 10: Markets don’t like uncertainty.
Underneath the hood, the St. Louis Fed Financial Stress Index shows that stress is minimal based on measures of financial market stress using 18 weekly data series, including interest rates, yield spreads, and volatility indicators. Zero represents normal conditions; positive values indicate above-average stress, and negative values indicate below-average stress.
Figure 11: Wars, trade tensions, political turmoil, and a spike in energy prices weren’t enough to stress out the financial markets for more than a day or two.
The Chicago Fed National Financial Conditions Credit Subindex (NFCI Credit Subindex) measures credit conditions in the U.S. using 100+ financial indicators, focusing on lending, borrowing, and credit market stress. Positive values indicate tighter-than-average conditions; negative values suggest looser conditions. Note: The Chicago Fed Survey of Economic Conditions also turned constructive in June, indicating better economic conditions.
Figure 12: Chicago’s measure of financial conditions focuses more on lending and borrowing and has also been improving. (Lower is better, indicating looser financial conditions.)
Where would we likely see one of the first signs of economic weakness show up? If weekly initial jobless claims approached 400,000, we would be concerned. So far, so good.
Figure 13: Even with the DOGE cuts, U.S. employment remains constructive for economic activity.
If we see initial claims move substantially higher and credit spreads widen, we will get defensive.
Figure 14: Credit spreads (OAS) for U.S. Corporates are at the low end of the 10-year range. This is a positive underpinning.
The composite below is based on non-farm payroll employment, industrial production trends, real personal income minus transfer payments, and real manufacturing and trade sales. The model does not currently forecast a recession.
Figure 15: The U.S. Recession Probability Model remains constructive for U.S. economic activity.
Upcoming Reports we’ll be watching closely:
Wednesday: New Home Sales (exp. 649k), Crude Oil Inventories (exp. draw of -1.1m)
Thursday: Unemployment Claims (exp. 244k), Durable Goods Orders (exp. +8.4% m/m)
Friday: Core PCE Price Index (exp. 0.1% m/m), Personal Income and Spending
Conclusion: The technical and operating environment indicators in the model remain supportive. Measures of economic activity, inflation trends, earnings trends, positioning, sentiment, and overbought/oversold are constructive. I recently came across an interesting term, “policy recession.” (Not sure of the attribution.) This seems to be an apt designation for 2025’s volatility, as while there have been fits and starts, the underlying structure of the markets is holding up well. At this juncture, our models remain positive, confirming that investors maintain their benchmark equity weightings. Of course, if our model moves to a sell, we will raise cash immediately.
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.
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 pcires for a basket of goods and services representative of aggregate U.S. consumer spending.
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.
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.
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