Day Hagan Catastrophic Stop Update June 9, 2026
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The Day Hagan Catastrophic Stop model remains at 86.4%. The model continues to indicate that investors should maintain their benchmark equity allocation.
Equities moved lower on Friday as the market absorbed a rates-up, growth-stock-down setup after a long winning streak. Moreover, the stronger-than-expected May payroll report dampened hopes of easier Fed policy and pushed Treasury yields higher, with the 10-year closing at around 4.55%. That hurt long-duration growth stocks, especially technology and semiconductors, where valuations had already reflected a lot of AI optimism. The selloff was also driven by a hot jobs report that raised fears of a more hawkish Fed, while chip stocks suffered one of their sharpest declines in years.
The weakness was also technical and positioning-related. After nine straight weekly gains for the S&P 500, investors used stronger-than-expected jobs data and rising yields as an excuse to take profits on crowded winners. Semiconductors were the pressure point, with the SOX down more than 10%, dragging the NASDAQ and broader market lower. Defensive sectors held up better, suggesting the session was more about de-risking and factor rotation than a broad economic growth scare.
Figure 1: A decline below 40% for two days would generate a risk-off signal for the S&P 500.
Concerns around a potentially meaningful increase in equity supply in 2026 also came to the forefront. The left panel shows that IPO issuance and expiring lockups are expected to rise sharply, with total supply approaching levels last seen during prior heavy issuance cycles. Importantly, the lighter bars show that supply does not just come from new IPO proceeds. It also comes from insider, employee, and early-investor shares becoming tradable after lockup periods expire.
The right panel puts that in market-cap context. Shares from expiring lockups are projected to reach roughly 0.7%-0.8% of the Russell 3000’s market value in 2026, which would be well above recent years but still below the extreme levels seen around 1999–2000.
The implication is that markets may face a larger supply headwind. More shares becoming available for sale can pressure individual stocks, especially richly valued IPOs or crowded growth names, unless investor demand remains strong enough to absorb the additional supply.
Figure 2: Concerns around additional equity supply.
Credit spreads remain tight. That is generally a healthy sign. Other parts of the fixed income market also look orderly, including companies' ability to issue new debt, limited stress in high-yield bonds, stable funding markets, and bond ETFs trading close to the value of their underlying holdings. However, not every measure is constructive. Interest-rate volatility remains elevated, and Treasury yields have moved around meaningfully as investors adjust expectations for inflation and Federal Reserve policy. Overall, credit markets appear well behaved, but rate volatility remains the main area to watch.
Figure 3: High-yield bond OAS is still constructive.
The DH 10-year Treasury model’s inputs indicate a fair value near 4.20%, below the 10-year yield of ~4.55%. German Bund yields and 6-month T-bill rates are the main upward supports, while the overnight financing rate and ISM Services Prices Paid pull fair value lower. Core PCE and the output gap have smaller effects. With the actual yield about 35 basis points above fair value, the model says Treasuries look modestly cheap, making the signal mildly bullish.
Consensus is not calling for a collapse in yields. Most forecasts cluster around the low-to-mid 4% range, but stronger economic data and sticky inflation have pushed some estimates toward 4.5%-4.7%. With the 10-year yield near 4.55%, the market is already pricing in a more cautious inflation and Fed backdrop.
Figure 4: Yields may be near resistance.
U.S. equity sentiment remains elevated but has eased from more extreme levels. The Day Hagan Daily Market Sentiment Composite recently fell to 71.41, just above the upper optimism bracket of 70. Historically, readings above this level have suggested that investor enthusiasm is extended and that the market may be more vulnerable to disappointment. However, the decline from recent highs indicates sentiment is no longer as stretched. Overall, sentiment remains a headwind, and risk-reward has become less favorable after the market’s strong advance.
Figure 5: Near-term, sentiment is excessively optimistic. A reversal back below 70 would generate a sell signal.
Interestingly, even with Friday’s downdraft, breadth held up pretty well.
Figure 6: Market breadth is neutral. A decline below 30 (50-day MA) would likely indicate oversold conditions.
Technical measures like shorter-term OBOS are now neutral and not significantly oversold.
Figure 7: SPX and Nasdaq RSI measures are reversing from extended levels in the near term. A decline below 30 would signal that oversold conditions have arrived.
Figure 8: Even with a 4.68% decline on Friday, NASDAQ OBOS indicators are generally neutral.
The most recent positioning data show a meaningful pullback in volatility-target equity exposure after briefly moving over +1 standard deviation. This suggests systematic re-risking has stalled or partially reversed, likely as realized volatility picked up and equity momentum weakened. In plain English, a short-term source of buying pressure has faded. Exposure is not deeply negative, so this is not yet a major de-risking signal. The latest move implies less mechanical support for equities in the near term, but it may eventually be a source of demand should the uptrend resume.
Figure 9: Volatility-targeting funds exposure is now neutral.
As detailed last week, DBMF's exposure to the SPX is relatively high, though not at the early-2024 peak.
Figure 10: Managed futures and trend-following funds likely have re-established their equity allocations at this point. There wasn’t much change last week.
A lot of folks went right back into cash on Friday. This, too, could be an eventual source of demand.
Figure 11: Investors moved quickly back to cash, based on this indicator.
The chart below shows that earnings revision momentum has been broadly positive in 2026, with S&P 500 forward EPS estimates up 11.4% year-to-date, placing revisions in the 100th percentile historically.
Leadership is concentrated in cyclical and growth-oriented sectors. Energy has seen the strongest revisions at +48.7%, followed by Information Technology and Communication Services, both in extreme-high historical percentiles. Materials, Real Estate, and Consumer Discretionary are also elevated, suggesting analysts have been raising expectations across several economically sensitive areas.
However, the right edges of several charts have begun to soften. Energy, Technology, Communication Services, Materials, Industrials, Utilities, Staples, and Health Care have all rolled over recently. That does not erase the strong year-to-date improvement, but it suggests the pace of upward revisions may be fading.
Bottom line: earnings expectations remain supportive, but the strongest revision momentum may already have occurred, making future market gains more dependent on companies beating higher expectations.
Figure 12: Earnings remain the key.
Another view of earnings momentum. We do note that the 3-month ROC of earnings estimate changes declined from 11.7% to 11.4% with this week’s update.
Figure 13: Earnings growth expectations remain constructive. However, this is a very high bar for corporate America to clear.
2026-2027 Cycle Composite indicates the potential for choppy markets until October.
Figure 14: Cycle composite for 2026 and 2027. Note: CY 2026 S&P 500 earnings growth expected to be +22.8%. (Source: FactSet)
The upcoming May CPI report consensus looks for core inflation to stay sticky, with core CPI expected near 2.9% year over year, slightly above April’s 2.8% reading. A hotter report would likely reinforce higher-for-longer Fed expectations, while a softer reading could ease pressure on Treasury yields and growth equities.
Figure 15: Pick an inflation measure. None are going to look good until energy prices retreat.
Recent U.S. economic data have leaned positive. Nonfarm payrolls rose 172,000 in May, unemployment held at 4.3%, and wage growth remained steady at 0.3% month over month and 3.4% year over year. April job openings increased to 7.6 million, suggesting labor demand has not broken. Services activity improved, with the ISM Services PMI at 54.5, business activity at 57.7, and new orders at 57.3. Manufacturing also firmed, with the S&P Global Manufacturing PMI rising to 55.3. Factory orders jumped 4.8%, durable goods orders rose 7.9%, and existing home sales edged higher. Atlanta Fed GDPNow also points to roughly 3.0% real GDP growth for Q2. Together, the data suggest the economy is improving, though not without inflation and rate-related risks.
Figure 16: Economic growth is OK.
The chart suggests Wall Street strategists are still mildly constructive on the S&P 500, but the upside implied by their year-end targets has narrowed. The average year-end forecast is roughly 7,612 versus the S&P 500 near 7,384, implying about 3.1% upside. That is below the long-term average forecast spread of 5.75%. In plain English, strategists are not bearish, but much of the expected 2026 upside has already been captured after the market’s strong advance.
Figure 17: Strategists have increased targets to 7,612 from 7,505, on average.
The chart below is interesting, showing that today’s AI-led market concentration is approaching prior bubble-era peaks, with the “AI Big 10” near 40% of the U.S. market cap. It is worthwhile because it highlights concentration risk and reminds investors that narrow leadership can become fragile. However, it is not definitive proof of a bubble. The comparison mixes different eras, sectors, profit profiles, and valuation structures. Today’s leaders are generally more profitable than many prior bubble favorites, so the chart is directionally useful but incomplete.
Figure 18: BofA Global Research, May 2026, likely May 22, 2026. Interesting, but not definitive.
U.S. Economic Releases:
Last week’s economic releases pointed to an economy that is still expanding, though unevenly. Services activity improved, job openings rose, factory orders were strong, and May payrolls beat expectations, all of which support a positive growth backdrop. At the same time, manufacturing remained soft, consumer confidence was weaker, and inflation-sensitive data such as ISM prices and wage growth suggest price pressures have not fully faded. For equity markets, the data are mixed: better growth supports earnings, but stronger labor data and sticky inflation may keep Treasury yields elevated and limit valuation expansion.
NFIB Tuesday.
CPI and 10-year bond Auction on Wednesday. Also, crude oil inventories data, which are becoming more closely watched.
PPI on Thursday, along with a 30-year bond auction.
And, as usual, the UoM Consumer Sentiment data on Friday, which is useless.
Figure 19: Economic release calendar. Source: Forexfactory.com
Bottom Line: The evidence remains mixed but generally supports maintaining benchmark equity exposure. The Catastrophic Stop model is still firmly positive, credit markets appear orderly, economic data are improving, and earnings revisions remain supportive. Those are important offsets to Friday’s weakness. At the same time, the market is no longer in the early stages of its advance. Sentiment remains elevated, upside for strategists is more limited, volatility-targeting demand has faded, and earnings expectations now represent a higher bar for companies to clear. Rising Treasury yields, sticky inflation, and the upcoming CPI report also remain important near-term risks, particularly for growth-oriented and highly valued stocks. Overall, the current backdrop argues against a major defensive shift but also calls for greater selectivity. We would characterize the environment as constructive but less forgiving, with stronger fundamentals balanced against valuation, concentration, and interest-rate sensitivity.
For more details on each sector and current model levels, please visit our research page at https://dayhagan.com/research.
This strategy uses measures of price, valuation, economic trends, liquidity, and market sentiment to make objective, rational, and emotion-free decisions about how much capital to place at risk and where to allocate it.
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Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
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S&P 500 Index—An unmanaged composite of 500 large-cap companies, 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. Professional investors widely use this index as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Sentiment – Market sentiment is the prevailing attitude of investors toward a company, a sector, or the financial market.
OBOS Indicators—The overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price to the trade margin of the given period.
Purchasing Manager Indexes (PMIs) – survey-based economic indicators that provide timely insight into business conditions.
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 prices for a basket of goods and services representative of aggregate U.S. consumer spending.
OAS: OAS spreads are the extra yield a bond offers over Treasuries, after adjusting for embedded options, used to gauge credit risk and relative value.
Catastrophic Stop model — Proprietary model used to indicate suggested equity exposure levels.
Russell 3000: The Russell 3000 Index measures the performance of approximately 3,000 of the largest U.S. publicly traded companies, representing about 98% of the investable U.S. equity market.
PPI: PPI, or the Producer Price Index, tracks average price changes producers receive for goods and services, offering an early signal of inflationary pressure.
PCE: Personal Consumption Expenditures measures prices paid by U.S. consumers across goods and services, serving as the Federal Reserve’s preferred broad inflation gauge.
Supercore PCE: Supercore PCE tracks services inflation, excluding energy and housing, helping policymakers assess underlying wage-sensitive price pressures that are less distorted by volatile categories.
DBMF: DBMF is an actively managed futures ETF that aims to mirror hedge fund trend-following strategies by using long and short futures positions across stocks, bonds, currencies, and commodities.
Communication Services sector: The Communication Services Sector includes telecom and media & entertainment companies, including producers of interactive gaming products and companies engaged in content and information creation or distribution through proprietary platforms.
Consumer Discretionary sector: The Consumer Discretionary sector's manufacturing segment includes automobiles & components, household durable goods, leisure products, and textiles & apparel. The services segment includes hotels, restaurants, and other leisure facilities. It also includes distributors and retailers of consumer discretionary products.
Consumer Staples sector: The Consumer Staples sector includes manufacturers and distributors of food, beverages, and tobacco, as well as producers of non-durable household goods and personal products. It also includes distributors and retailers of consumer staples, including food & drug retailers.
Energy sector: The Energy sector includes companies that operate in exploration & production, refining & marketing, and storage & transportation of oil & gas, as well as coal & consumable fuels. It also includes companies that offer oil & gas equipment and services.
Financials sector: The Financials sector encompasses banking, financial services, consumer finance, capital markets, and insurance. It also includes Financial Exchanges & Data and Mortgage REITs.
Fixed Income sector: The Fixed Income sector includes investment securities that pay investors fixed interest payments until maturity. Designed for income generation and capital preservation, this sector includes government, corporate, and municipal bonds, as well as certificates of deposit (CDs).
Health Care sector: The Health Care sector includes health care providers & services, health care equipment & supplies, and health care technology companies. It also includes companies involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.
Industrials sector: The Industrials sector includes aerospace & defense, building products, electrical equipment, machinery, and companies that offer construction & engineering services. It also includes providers of commercial & professional services, including printing, environmental & facilities services, office services & supplies, security & alarm services, human resources & employment services, and research & consulting services. It also includes companies that provide transportation services.
Information Technology sector: The Information Technology sector includes software and information technology services, manufacturers and distributors of technology hardware & equipment, such as communications equipment, cellular phones, computers & peripherals, electronic equipment and related instruments, and semiconductors and related equipment & materials.
Materials sector: The Materials sector includes chemicals, construction materials, forest products, glass, paper and related packaging products, and metals, minerals, and mining companies, including steel producers.
Real Estate sector: The Real Estate sector includes companies engaged in real estate development and operation. It also includes companies offering real estate-related services and Equity Real Estate Investment Trusts (REITs).
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