Day Hagan Catastrophic Stop Update June 3, 2025
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The Catastrophic Stop model is unchanged from last week at 77.27%. 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), High-Yield Bond Breadth, and Baltic Dry Index rate trends remain positive.
Note: The June 2025 Smart Sector with Catastrophic Stop monthly letter is now available at https://dayhagan.com/research/day-hagan-smart-sector-strategy-update-june-3-2025.
Figure 1: The Catastrophic Stop model signals a fully invested equity position (relative to the benchmark). Note: The model’s levels prior to 5-1-2025 have been archived. As of that date, the model was modified to include Breadth Thrust and Oversold Mean Reversion clusters (detailed in our May Update). Due to the use of indices to extend model history, the model is considered hypothetical.
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.
Consumer Sentiment: J.P. Morgan analyzed S&P 500 performance following peaks and troughs in the University of Michigan Consumer Sentiment index and found that troughs in sentiment were typically bullish longer-term, with nine observations showing an average 12-month return of 24.1%. Of course, we’ve all read about the wildly divergent views between Democrat and Republican respondents, with Democrats showing significantly more negativity (historically, Republicans have shown more negativity during Democrat administrations). Point being, around half of the respondents are extremely negative, which can become a source of demand as markets move higher.
Figure 3: A reversal from these historically low levels of consumer sentiment would be constructive. The latest figure, for May, is 52.2, revised up from the 50.8 shown on the chart.
Positioning: Following up from last week’s update, the Smart Money Confidence composite stalled in the neutral zone. The composite shows that Smart Money is less confident but has not yet crossed the sell threshold. A decline below 0.3 would signal caution, but as you can see on the chart, equities tend to hold up until the indicator reverses back above the 0.3 level.
Figure 4: Smart Money Confidence is less bullish, but not (yet) on a sell.
Systematic and Algo Traders: Based on the 3Fourteen chart below, funds targeting 10% volatility (annually) remain underweight stocks. We note that recent data indicate CTAs are potential net sellers over the near term, and that gross leverage among hedge funds is high (net leverage statistics are more neutral). In our estimation, the overall picture is one where several investment allocation categories remain underinvested.
Figure 5: Several investment allocation categories may be forced to chase the markets higher.
They also show that 20%+ rallies in 28 days are very rare.
Figure 6: Rallies of 20%+ in 28 days don’t happen often.
Based on an analysis of the three previous instances, forward returns have been very favorable.
Figure 7: Momentum thrusts have been bullish.
Gamma positioning: Goldman Sachs (via MarketEar) notes that “[Dealer] Short gamma grows to the upside,” and “They become long gamma to the downside.” This has the effect of juicing up moves and muting down moves in the near term. (Seeing some of that play out today…)
Figure 8: Upside convexity is higher than downside convexity.
Breadth: While the Mag7 are playing catch-up and buybacks remain supportive, we note that, based on the percentage of stocks above their 10- and 200-day moving averages, breadth is neutral. About 46% of S&P 500 companies are trading above their respective 10-day MAs, and 50.6% are above their 200-day MAs.
Figure 9: Breadth statistics do not signal significant overbought conditions.
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 10: The upper and lower range levels for the June 20 OPEX are 5,850 and 6,109.
Operating Environment
U.S. Economic Activity: We continue to view U.S. economic activity as moderate, which is constructive for equities. “Hard” economic data has been evidencing recent strength, while “Soft” data plummets. Hard economic data are quantitative, measurable indicators (e.g., GDP, unemployment). Soft data are subjective, survey-based (e.g., consumer confidence). We prefer hard data to identify trends, while extremes in soft data help identify turning points. Recently, JP Morgan increased their y/y estimate for Q2 real GDP to 4%. The latest Q2 GDPNow estimate is 4.6% (as of 6-2-2025).
Last week, the Conference Board Consumer Confidence Index, Durable Goods Orders, Trade Balance, Personal Income, and UoM Consumer Sentiment were better than expected. Q1 GDP was revised up to -0.2%. Housing prices declined m/m, Pending Home Sales, the Chicago PMI, and Unemployment Claims missed expectations. On Monday, the ISM Manufacturing PMI was just 48.5, and construction spending was negative. Today, the JOLTs report was better than expected (especially important in light of Friday’s employment report), but Factor Orders slowed (following the ramp-up last month ahead of the tariffs).
Figure 11: Overall, hard data is improving.
Inflation: Inflation concerns have increased due to tariff uncertainty and the resulting pull-forward of demand. However, our view is that this is likely a temporary situation. China and the Eurozone are experiencing slowing economic activity, which has historically capped inflation spikes. Commodity prices are the canary in the coalmine, and prices remain well below the January highs.
Figure 12: Inflation pressures are muted. The GSCI ETF is in the middle of the year’s range.
Upcoming Reports we’ll be watching closely:
Wednesday: ADP nonfarm employment change, Services PMIs (Final and ISM, expected to be 52.3 and 52, respectively)
Thursday: Unemployment claims (exp. 236k), Trade Balance (exp. -67.6B), several Fed Members
Friday: Non-Farm Employment (exp. 132k), and Consumer Credit (exp. +11.3B)
Conclusion: As I’m writing this, SPX is on the cusp of 6,000 again. Hard economic data is supportive, and our view is that a decent employment report this Friday (over 130k jobs) could be the catalyst for a decisive break above. Earnings are supportive, with FactSet writing, “For Q2 2025 through Q1 2026, analysts are predicting earnings growth rates of 14.0%, 8.9%, 10.6%, and 10.2%, respectively.”
At the same time, many of the indicators within the Catastrophic Stop model are at levels that could quickly turn to sell signals if the market turns. Nonetheless, the model continues to support a fully invested equity allocation relative to your benchmarks.
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.
MAG7 – A group of seven high-performing and influential stocks in the technology sector.
Purchasing Manager Indexes (PMI) – Purchasing Managers’ Index is a survey-based economic indicator designed to provide a timely insight into business conditions.
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