Day Hagan Catastrophic Stop Update March 25, 2025
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The Catastrophic Stop model increased to 56.43% from 51.43% last week due to the “High Yield and Emerging Market Bond Factor” shifting from neutral to bullish. In other words, the fixed-income markets are holding up well. We’d also note that global equity breadth is constructive, and volume-adjusted demand continues to outpace supply. We are still watching for a longer-term breadth indicator to trigger a buy signal (we monitor several versions), providing greater evidence that the correction lows have been tested and are likely to hold. Short-term sentiment levels continue to illustrate excessive pessimism (bullish). At the same time, equity positioning is at the lower end of the 1- and 5-year ranges. This is constructive from a contrary opinion perspective. From a macro viewpoint, economic activity is expected to be positive throughout 2025, though slightly below trend, as inflation continues to moderate.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return Index.
3Fourteen Research notes that corrections of 10% have historically been a buying opportunity as long as there isn’t a recession within the next 12 months. They note that since 1950, “Once the S&P 500 has corrected (-10%), a recession (or Fed tightening) is historically required to create significant further downside (i.e. another 10%).” At this juncture, our indicators and models calling economic activity remain positive, on balance. Furthermore, we do not anticipate a rate hike in the foreseeable future.
Figure 2: Average path of the S&P 500 after 10% corrections delineated based on whether a recession begins within 12 months.
They take it a step further by noting that a 10% correction with no recession, followed by the S&P 500 reclaiming its 200-day moving average, usually marks the end of the correction.
Figure 3: A 10% correction, no recession, and a move back above the 200-day MA have historically marked a good time to put money to work.
Our Volume-Adjusted Demand Minus Supply Factor recently bounced off the signal threshold level. This is similar to the action seen at the 2023 and 2024 lows (green dashed line). Nonetheless, you can see on the chart how important it is to the “bounce/rally” view that this indicator remains bullish.
Figure 4: Demand continues to outpace supply.
While not a prerequisite for a renewed uptrend, we’d like to see one of our favored breadth thrust indicators generate a buy signal to increase the probability that a sustainable uptrend has begun.
Figure 5: Breadth thrust buy signals based on the 10-day A/D line (among others) have historically identified significant investable lows. Since 1947, 45 out of 46 signals have seen positive returns.
Sentiment is working its way back to neutral. This indicator remains a tailwind.
Figure 6: Short-term sentiment is bullish.
Goldman Sachs, via MarketEar, notes that “Hedge Funds have rarely been more bearish.” Another positive from a contrary positioning/sentiment perspective.
Figure 7: Positioning is reminiscent of current sentiment readings: Pessimism levels are excessive relative to history.
Overall equity positioning, according to DB (via MarketEar), has also been reduced and is now at levels indicating that investors are underweight stocks.
Figure 8: Positioning levels are similar to those seen during the 2023 and 2024 lows.
Why is now different from, say, 2022? Well, in 2022 inflation hit a 40-year high (CPI peaked at 9.1% in June), and the Fed shifted from an accommodative stance to aggressive monetary tightening (started to raise interest rates in March with large hikes [75 bps – remember those?] in June, July, September, and November), Russia invaded Ukraine on February 24th, Brent Crude oil prices spiked to over $120 in June), natural gas soared in Europe due to reliance on Russian supplies, food prices rose as Ukraine (a significant grain exporter) faced export challenges, after the 2021 tech sector bull market, investors rotated out of high-valuation growth stocks into value (NASDAQ fell 33% vs. 19.4% for the S&P 500), the yield (10-2) curve inverted in July 2022, China’s real estate market was tanking (remember Evergrande), the fiscal stimulus excesses from 2020-2021 were starting to fade (consumer spending shifted from goods to services), and labor markets were tight, driving wage inflation. So, we don’t quite see the comparison with 2022 here. We do see a resemblance between now and October 2023 and August 2024.
For those interested in the progression of rates, below is a list of the Federal Open Market Committee (FOMC) rate changes to the federal funds rate over the past five years based on historical data and FOMC announcements.
2020
March 3, 2020: -50 bps
New range: 1.00%–1.25% (from 1.50%–1.75%)
Emergency cut due to emerging COVID-19 risks.
March 15, 2020: -100 bps
New range: 0.00%–0.25% (from 1.00%–1.25%)
Second emergency cut as the pandemic halted economic activity; rates hit the effective lower bound.
No further changes in 2020; rates remained at 0.00%–0.25% through 2021.
2022
March 16, 2022: +25 bps
New range: 0.25%–0.50% (from 0.00%–0.25%)
First hike since 2018, responding to rising inflation post-pandemic.
May 4, 2022: +50 bps
New range: 0.75%–1.00% (from 0.25%–0.50%)
Larger hike as inflation accelerated (e.g., CPI hit 8.6% in May).
June 15, 2022: +75 bps
New range: 1.50%–1.75% (from 0.75%–1.00%)
Aggressive move to combat persistent inflation, the largest single hike since 1994.
July 27, 2022: +75 bps
New range: 2.25%–2.50% (from 1.50%–1.75%)
Continued tightening as inflation remained high.
September 21, 2022: +75 bps
New range: 3.00%–3.25% (from 2.25%–2.50%)
Third consecutive 75 bps hike, reflecting Fed’s resolve.
November 2, 2022: +75 bps
New range: 3.75%–4.00% (from 3.00%–3.25%)
Fourth 75 bps hike, pushing rates to the highest since 2008.
December 14, 2022: +50 bps
New range: 4.25%–4.50% (from 3.75%–4.00%)
Smaller hike as inflation showed signs of cooling (CPI fell to 7.1% in November).
2023
February 1, 2023: +25 bps
New range: 4.50%–4.75% (from 4.25%–4.50%)
Slower pace as inflation moderated (CPI at 6.4% in January).
March 22, 2023: +25 bps
New range: 4.75%–5.00% (from 4.50%–4.75%)
Continued tightening despite banking stress (e.g., SVB collapse, money moving from cash to higher-yielding accounts).
May 3, 2023: +25 bps
New range: 5.00%–5.25% (from 4.75%–5.00%)
Nearing peak as inflation eased further (CPI at 4.9% in April).
July 26, 2023: +25 bps
New range: 5.25%–5.50% (from 5.00%–5.25%)
Final hike of the cycle, with inflation at 3.2% in July; highest range since 2007.
No changes from August 2023 through July 2024; rates held at 5.25%–5.50%.
2024
September 18, 2024: -50 bps
New range: 4.75%–5.00% (from 5.25%–5.50%)
First cut since 2020, citing progress on inflation (CPI at 2.5% in August) and labor market risks.
November 7, 2024: -25 bps
New range: 4.50%–4.75% (from 4.75%–5.00%)
Continued easing as unemployment rose slightly (4.1% in October).
December 18, 2024: -25 bps
New range: 4.25%–4.50% (from 4.50%–4.75%)
Third cut, balancing inflation (CPI at 2.6% in November) and growth.
2025
January 29, 2025: No change
Range: 4.25%–4.50%
Pause to assess economic conditions under new policy uncertainties (e.g., Trump administration tariffs).
March 19, 2025: No change
Range: 4.25%–4.50%
Held steady, with the Fed projecting two cuts later in 2025; inflation at 2.8% (core PCE) expected by year-end.
Lastly, we’d be remiss if we didn’t mention the Flash PMI reports for U.S. Services and Manufacturing that were released yesterday. The Flash S&P Global U.S. Manufacturing PMI declined, likely due to a winddown of the accelerated purchasing in advance of potential tariffs. However, there were some concerns raised as employment declined for the first time since last October and input cost inflation hit a 31-month high. We’re keeping an eye on commodity prices for confirmation that the prices paid are sticky. Currently, about half of 19 commodities covered are above their 50-day moving averages, with two-thirds supported by rising 50-day moving averages. Keep in mind that last month’s CPI and PPI reports were better than expected (less inflation), so there will likely be even more attention paid to the next reports on 3-28 (Core PCE), 4-10 (CPI), and 4-11 (PPI). Note that the Manufacturing PMI had its largest increase in three years in February, so it appears reasonable that this reflects some giveback.
Figure 9: The Flash Manufacturing PMI for the U.S. exposed some concerns. We’ll be monitoring production and inflation-adjacent indicators for signs of confirmation.
The Flash S&P Global U.S. Service PMI outperformed expectations, showing improvement in employment, output growth, strengthening consumer demand, and better weather. Service exports were down for the third consecutive month. Overall, this preliminary set of indicators shows that economic activity is picking up slightly from earlier in the year.
Figure 10: The service economy is holding up well.
Bottom Line: The Catastrophic Stop model continues to recommend a fully invested position (e.g., match your equity benchmark). Measures of economic activity, inflation trends, earnings, the corporate operating environment, and economic liquidity are supportive. Short-term technicals support a bounce. However, should the model move to levels triggering a sell signal, we will quickly rebalance the portfolios in response.
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.
FOMC Meeting – The FOMC (Federal Open Market Committee) 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.
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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