Day Hagan Catastrophic Stop Update March 24, 2026
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The Day Hagan Catastrophic Stop model level declined to 50.0% as the intermediate-term trend factor turned negative. The overall model remains above the key 45% threshold, indicating that investors should maintain their benchmark equity exposure.
Figure 1: The Catastrophic Stop model is moving closer to a sell signal (below 40% for two consecutive days).
The intermediate-term trend factor is represented by the 21-day/63-day MACD, shown below. The indicator has historically signaled a defensive posture during pullbacks and shown the ability to move back to buy or neutral levels relatively quickly once an uptrend has been re-established. As with all of our trend indicators, its purpose is to keep us aligned with the major trend. Note that drawdowns are annualized.
Figure 2: Signs of a trend breakdown appearing. A move back above the upper bracket would shift this indicator to neutral.
Breadth is deeply oversold. The McClellan Oscillator, a short-term breadth momentum gauge, is at −77.6, placing it in the 5th percentile since 2018. The Zweig Breadth Thrust, which tracks a 10-day EMA of advancing issues, stands at 0.406, in the 7th percentile and near its 0.40 oversold threshold. Historically, when both indicators reach these extremes together, forward 1-, 3-, and 6-month returns have been skewed positive, although deeper sell-offs can still produce temporary false bottoms.
Figure 3: Short-term oversold conditions are in place. The McClellan Oscillator is at the 5th percentile since 2018. The indicator spends only about 5% of its time at this level or worse. Zweig Breadth Thrust is in the 7th percentile — sitting right on the 0.40 oversold threshold. Only 6% of the time has it been lower.
Volatility signals are nuanced but supportive. VIX at 26.8 (87th percentile since 2018) is the stronger signal and has historically been associated with meaningfully above-average 1-, 3-, and 6-month S&P 500 returns. MOVE at 108.8 (76th percentile) is directionally supportive but less extended relative to the range. With both elevated—a relatively rare dual-stress regime—history suggests above-average forward returns, though with wider outcome dispersion during more severe episodes such as 2020 and the 2022 bear market.
Figure 4: Volatility measures also signify short-term reflex rally potential. Longer-term, the indicators are more mixed.
The 50-day breadth is unambiguously oversold and historically a strong buy signal on a 3–6-month horizon (87–90% hit rate). The 200-day breadth is the watch item — it's falling fast but hasn't reached capitulation levels. If 200-day breadth stabilizes in the 35–45% zone and starts to hook back up, that would confirm the oversold bounce. If it continues to plunge toward 20–25%, that would suggest a deeper correction similar to 2022, when oversold signals came early.
This is consistent with what the other four indicators told us: heavily oversold with strong bullish base rates, but with the caveat that the speed of deterioration warrants monitoring for further breakdown.
Figure 5: Shorter-term breadth measures oversold.
Sentiment is the most lopsidedly bullish of all the indicators we've examined. The DH Composite provides a compelling contrarian case. The catch is the same one that applies across all six indicators: the 1-month horizon remains uncertain (the crowd can stay scared while prices fall further), but over a 3–6-month horizon, extreme bearish sentiment has been one of the most reliable buy signals in the toolkit. This is fully consistent with everything the breadth, volatility, and positioning data told us.
Figure 6: Sentiment is pessimistic.
The chart below indicates that the sell-off has been grinding, not panicky. The S&P is down meaningfully, but in an orderly fashion — no 3–5% single-day drops that would spike realized vol into the 25–30%+ range where these strategies are forced to aggressively dump equities. If vol spikes from here (say, VIX goes to 35+ and realized vol catches up), these strategies would be forced to rapidly cut equity exposure — from 75% to 40–50%. That would create a new wave of selling that hasn't happened yet. We also note that the "capitulation" ingredient is missing. The deepest oversold signals historically come when breadth, sentiment, and forced mechanical selling all converge. Right now, we have the first two but not the third. This is the pattern of early 2022 — sentiment and breadth got oversold first, but vol-target strategies didn't fully de-risk until the Oct 2022 bottom.
Figure 7: The vol-target z-score is the one indicator not confirming the oversold thesis. It's saying that while sentiment is deeply bearish and breadth is washed out, the market hasn't experienced the kind of acute volatility spike that forces mechanical de-risking. This could mean either: (a) the sell-off stabilizes here without needing that catalyst (like a sentiment-driven bounce), or (b) there's a risk of another leg lower if vol escalates and triggers the mechanical selling that hasn't happened yet. Among the ten indicators we've analyzed across five dashboards, this is the primary reason for caution on the 1-month horizon, even as the 3–6 month base rates from the other signals remain positive.
DBMF exposure confirms what the other "positioning" indicators (E-mini shorts, vol-target) are saying: sophisticated systematic strategies are de-risking but haven't capitulated. The equity beta is still positive (bullish on a contrarian basis — they haven't panicked), but the trajectory is downward (cautious — more mechanical selling could come).
Across all six indicator pairs plus the two supplemental indicators (vol-target and now DBMF), the weight of evidence is:
Very oversold: Breadth, sentiment (DH Composite, AAII Bears), McClellan Oscillator
Supportive: VIX, E-mini short covering
Neutral with bullish trajectory: SKEW, DBMF exposure (still long but de-risking)
Cautionary flags: Vol-target z-score (no forced selling yet), DBMF equity beta still declining (more mechanical selling possible)
Figure 8: Managed futures strategies are likely still underexposed to equities. Potential source of future demand.
The breakeven rates are telling us something fundamentally different from the other indicators — and it's the single biggest risk factor in the current picture.
The headline: The bond market is pricing an enormous near-term inflation shock.
The 1Y breakeven at 5.38% (98th percentile) has surged by +3.09 percentage points since Dec 31 — a move nearly as fast as during the 2022 inflation crisis. The market is pricing in a massive one-time price level shock over the next 12 months.
The term structure is the critical signal:
The steep decline from 1Y (5.38%) → 2Y (3.38%) → 5Y (2.70%) → 10Y (2.39%) tells you the bond market views this as temporary, not structural. The 10Y–1Y spread is at −3.00%, the most inverted it has ever been in our data. Ninety-six percent of the inflation repricing since year-end has been concentrated in the front end, with the 10Y barely moving (+0.14%). Long-run inflation expectations remain well-anchored.
Why this matters for the oversold thesis — it's the primary headwind:
Unlike the other indicators that are flashing green for contrarian bulls, the breakevens are flashing amber to red:
When 1Y breakevens have been in the top quintile (above 3.2%), the S&P 500's average 3-month forward return is −0.5% and the 6-month return is just +0.4% — dramatically worse than baseline
When the 10Y–1Y spread is in its most inverted quintile, 3-month returns average just +0.3% and 6-month returns +1.7% — again well below normal
The only prior period with 1Y breakevens above 4.5% was Feb–Jun 2022. The S&P fell 13.2% during that episode before eventually stabilizing
The 2022 analogy is instructive but imperfect:
In 2022, the 1Y breakeven peaked at 6.31% during the post-Ukraine/inflation panic. We're at 5.38% and still rising. In 2022, the elevated breakevens persisted for 93 trading days before normalizing, and the equity market continued to struggle throughout. The S&P was basically flat 6 months after breakevens peaked.
What this means for the broader picture:
This is the single most important counterpoint to the deeply bullish breadth, sentiment, and positioning signals. The other indicators say the market is deeply oversold and ripe for a bounce. The breakevens say the market has a legitimate fundamental reason to be weak — an incoming inflation shock from tariffs that:
Constrains the Fed — with 1Y breakevens at 5.38%, rate cuts are essentially off the table until inflation expectations stabilize, removing the "Fed put" from the equation. Compresses real earnings growth, cost increases squeeze margins unless companies can fully pass through, which takes time
Creates policy uncertainty — the trajectory is still accelerating (+1.82% in just the last month), meaning markets don't yet know where this tops out
Figure 9: The breakeven data is the strongest argument that this sell-off isn't just sentiment-driven — it has a real fundamental catalyst. The oversold readings in breadth and sentiment argue for a tactical bounce, but the break-even levels suggest that any bounce may be limited in magnitude and duration until the inflation shock is either absorbed or policy is walked back. The fact that long-end expectations remain anchored (10Y at 2.39%, only the 81st percentile) is the saving grace — it suggests this remains a tradable correction rather than a structural regime change, but only if the energy shock's impact truly proves temporary, as the bond market currently assumes.
The tables below illustrate current market expectations for WTI Oil prices based on current futures contract pricing.
Investors are looking for $73 by the end of this year, $70 by the end of 2027, $67 by the end of 2028, and $66 by the end of 2029.
Our view is that current production exceeds demand and that prices will fall more quickly once supply chains are unclogged. But this is what you're betting against if you go long WTI.
Figure 10: Futures contracts indicate investors see energy price declines over time, but it appears that they aren’t overly optimistic.
Note that Crude Oil Managed money shorts have been significantly reduced. One might think that this is a contrary opinion, and they’d be right.
Figure 11: Crude oil managed money short positions have been meaningfully reduced.
Even with extraordinary levels of uncertainty, Q1 2026 real GDP growth estimates remain at 2% according to the Atlanta Fed GDPNow model. Our work confirms a slightly below trend outlook for Q1, but it is still positive.
Figure 12: Residential investment is detracting from economic growth projections. We’re also keeping an eye on the consumer, given the increase in energy costs.
In my view, the chart below is remarkable. While equity markets are struggling and macro risks are elevated, the declines remain within the bounds of a normal pullback.
Figure 13: Market rotation is happening beneath the surface.
OAS for Investment-Grade Corporates actually declined over the last week, even as Treasury rates climbed.
Figure 14: Credit spreads holding near the low end of the respective ranges are a crucial component for a constructive view in the face of rising rates
Perhaps surprisingly, forward earnings estimates for the S&P 500 continue to ramp higher, primarily due to the energy sector’s windfall.
Figure 15: Our work shows that “Big Bear Markets” don’t typically occur in an environment of rising earnings. We understand the lag often associated with using earnings data, but this measure includes revision activity, not just quarterly-reported numbers.
The FactSet chart below shows that CY 2026 S&P 500 earnings are expected to come in at +16.3%. Note the increase in the Energy sector’s outlook—that number was negative just a few short weeks ago.
Figure 16: FactSet shows earnings expectations are still a tailwind.
Given the inflation and economic backdrop, we do not foresee a rate cut in the foreseeable future unless the economy hits a significant speed bump. Given the Flash PMIs today for Manufacturing and Services, the economy is still chugging along—not too hot and not too cold. But we won’t hesitate to say that the risks are on the downside.
Figure 17: 2-year Treasury versus the Fed funds rate shows that market participants aren’t anticipating a rate cut soon.
Figure 18: Economic release calendar. Source: Forexfactory.com
Bottom Line: The Day Hagan Catastrophic Stop has fallen to 50% as the intermediate-term trend factor turned negative, but it remains above the 45% threshold that argues for maintaining benchmark equity exposure. At the same time, breadth, sentiment, and volatility indicators are uniformly washed out: McClellan, Zweig, 50-day breadth, VIX, and bearish sentiment all point to a market that is deeply oversold and historically prone to above-average 3–6 month rebounds. Positioning data suggest systematic investors have de-risked but have not fully capitulated, leaving room for future demand. The key near-term risk is that realized volatility has not yet spiked enough to force full mechanical selling, while front-end breakevens signal a meaningful but likely temporary inflation shock. Conditions support a tactical rebound, but gains may be choppy until inflation fears and volatility stabilize.
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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
Sources:
https://www.atlantafed.org/research-and-data/data/gdpnow
https://www.3fourteenresearch.com/
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S&P 500 Index—An unmanaged composite of 500 large-cap 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. 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.
CBOE Volatility Index (VIX) – A real-time index that represents the market’s expectations for the relative strength of near-term price changes of the S&P 500 Index (SPX). Because it is derived from SPX index options with near-term expiration dates, it produces a 30-day forward volatility projection. Volatility, or how quickly prices change, is often seen as a way to gauge market sentiment, particularly the degree of fear among market participants.
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.
NFIB – The National Federation of Independent Business advocates for America’s small and independent business owners.
Purchasing Manager Indexes (PMIs) – Purchasing Managers’ Indexes are survey-based economic indicators designed to provide timely insight into business conditions.
FOMC Meeting – The FOMC (Federal Open Market Committee) holds 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.
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.
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