Day Hagan Catastrophic Stop Update March 11, 2025
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The Catastrophic Stop model declined to 63.57% from 70.71% last week. The model’s technical indicators are now neutral on balance due to the short-term trend factor turning negative, joining the stock/bond relative strength factor. Neutral readings are in place for our breadth thrust and oversold mean reversion factors. Positive technical factors include global equity breadth, intermediate-term trend, and volume demand/supply. Importantly, our models and indicators do not indicate that a recession is currently in place or imminent. Our external factors show that the sentiment composite is bullish (currently registering extreme levels of pessimism), option-adjusted spreads remain narrow, and high-yield and emerging market bond breadth is positive. Overall, the model’s indicators indicate that the current decline is still within the context of the longer-term uptrend.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return Index
As the market weakness enters a third week, the chart below provides valuable perspective. Dips (5% or more moves) occur about 3.4 times per year, and corrections (10% or more moves) occur a little more than once per year. Corrections have lasted an average of 99 days. With credit spreads remaining relatively narrow, we’re not currently expecting a protracted decline. However, if our models shift to negative, we will rebalance accordingly.
Figure 2: Anatomy of S&P 500 Index Declines since 1928
Why is the market so volatile? Several reasons come to mind: Trading (top of book) liquidity is very low, systematic selling was rampant (though gross and net exposure levels have been largely worked off to neutral levels), and daily proclamations around tariffs, fiscal policy, and geopolitical hotspots are ratcheting up uncertainty. For example, the chart below describes the gamma condition around SPY. When gamma is negative, moves tend to be exaggerated in both directions. Given the low trading liquidity and systematic selling of late (as well as a massive rotation out of Mag 7 names), the volatility, or path of least resistance, has been to the downside, and negative gamma conditions have supercharged it. However, at this point, our indicators confirm there are now significant oversold conditions in place, and excessive pessimism is at levels seen at the 2022 and 2020 lows. While only part of our tapestry of indicators, this does highlight the opportunity for a solid rally.
Figure 3: The gamma condition of the market is negative (source: MarketEar). A move to positive would support an uptrend.
The chart below illustrates that CTAs have been selling aggressively for the past 5 days, and the selling volume is consistent with what was registered at the 2023, 2020, and 2018 lows.
Figure 4: Selling pressure from systematic investors has been significant but is now at levels consistent with previous reversals.
The question, of course, is, “Will the U.S. enter a recession?” Given the oversold conditions, the pessimism, etc., and the forced selling, markets are at levels that should hold—unless the economy is hitting a large pothole. Our work currently does not support a recession case.
Figure 5: M2 money supply year/year change is positive. Speaks to economic liquidity.
Employment is relatively strong.
Figure 6: Employment statistics are inconsistent with a recession, though there can be some lag in the numbers. The level of “Job Losers” is at the lower end of a nearly 60-year range.
Financial stress is low, especially considering the recent downturn and global crosscurrents.
Figure 7: The St. Louis Fed Financial Stress Index evaluates interest rates, yield spreads, equity and bond volatility, inflation measures, and equity trends. The weight of the evidence indicates that financial stress is still relatively low and confirms that the markets are functioning normally.
The environment for earnings growth also remains positive. PMIs, credit spreads, EPS momentum, and the percentage of upward revisions are constructive. Interestingly, FactSet notes that “Through Document Search, FactSet searched for the term ‘recession’ in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from December 15 through March 6. Of these companies, 13 cited the term ‘recession’ during their earnings calls for the fourth quarter. This number is well below the 5-year average of 80 and the 10-year average of 60. In fact, this quarter marks the lowest number of S&P 500 companies citing ‘recession’ on earnings calls for a quarter since Q1 2018.”
Figure 8: Although earnings forecasts have decreased in recent weeks, the overall environment is still supportive.
Unfortunately, there was a counterbalance to the word “recession.” And that word is “tariffs.” FactSet also noted that “Given the Trump administration implementing tariffs during the past week, have S&P 500 companies commented on tariffs during their earnings conference calls for the fourth quarter? The answer is yes. FactSet Document Search (which allows users to search for key words or phrases across multiple document types) was used to answer this question. Through Document Search, FactSet searched for the term ‘tariff’ and ‘tariffs’ in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from December 15 through March 6. Of these companies, 259 have cited the term ‘tariff’ or ‘tariffs’ during their earnings calls for the fourth quarter. This marks the highest number of S&P 500 companies citing ‘tariff’ or ‘tariffs’ on quarterly earnings calls over the past 10 years (using current index constituents going back in time). The previous record-high number during the past 10 years was 185 companies, which occurred in Q2 2018.”
Figure 9: One of the main sticking points is the uncertainty around tariff policy and potential reciprocity. As we’ve discussed in previous emails, if tariffs and reciprocal tariffs are maintained around the 25% level (on average for most goods), the hit to U.S. GDP is estimated to be around 50 bps while increasing inflationary pressures by 60 bps in 2025 (source: GS).
Turning to the technicals, below are charts illustrating sentiment, OBOS, and OAS.
Sentiment levels are consistent with previous market lows—unless a significant economic downturn is in the wings. (Our work indicates a slowdown in economic activity but not a recession. Keep in mind that the NBER evaluates real personal income, employment, industrial production, real manufacturing and trade sales, and other supplementary indicators like consumer spending, capex trends, and financial market conditions. Also, downturns in the aforementioned indicators must be broad-based, not specific to a few individual sectors.)
Figure 10: Excessive pessimism.
Credit spreads are widening, but from very low levels. Not an issue at this point.
Figure 11: Given the hit to small-caps, we’d expect a more significant widening in High-Yield OAS. The fact that it hasn’t is constructive.
The NASDAQ A/D line has taken a hit, but the decline didn’t rise to the level of a confirmed “Bearish Downside Thrust.” This speaks to the MAG7 influence versus the rest of the index. We’d like to see an “Upside Thrust” to confirm that the worst of the current selloff is behind us. (We track dozens of breadth thrust indicators. As they fire, we’ll feature them in this update.)
Figure 12: The downside move in the NASDAQ has been orderly.
A buy signal from the Momentum Reversal indicator would be helpful. If the orange line moves above the lower Standard Deviation bracket, it will generate a short-term buy signal.
Figure 13: Our shorter-term indicators have flipped negative but are unconfirmed by our intermediate-term measures. We will continue to invest in accordance with the models' messages.
Bottom Line: Economic activity is slowing in the U.S. and abroad. However, growth is still modestly positive and expected to continue higher for the year. Inflation concerns have increased, but the weight of the evidence shows that inflation pressures are still rated neutral. The recent outperformance of U.S. Treasuries confirms that view. Nonetheless, our sector investment models have shifted toward defense over the past few months, providing some volatility relief. If the Catastrophic Stop turns negative, we will immediately raise cash.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk and where to place 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 convenient time.
I hope you have a wonderful week,
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. Charts courtesy Ned Davis Research (NDR). © Copyright 2025 NDR, Inc. Further distribution is prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
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.
Purchasing Manager Indexes (PMI) – Purchasing Managers’ Index is a survey-based economic indicator designed to provide a timely insight into business conditions.
OBOS Indicators – Overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price with the trade margin of the given period.
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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