Day Hagan Catastrophic Stop Update March 30, 2026
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The Day Hagan Catastrophic Stop model declined to 45.45% from 50.0% last week, driven by a widening of high-yield option-adjusted spreads, which points to building market stress. However, the model remains above the critical 45% threshold, indicating that investors should maintain benchmark equity exposure.
Figure 1: The Catastrophic Stop model remains constructive for equities.
Here are a few of the issues that are top of mind:
The Iran conflict is heading into month 2, longer than expected, and the fighting is not contained. The potential knock-on effects are becoming more likely.
Oil prices have skyrocketed, and the Strait of Hormuz remains functionally unsafe, and concerns are growing around the Red Sea, Suez Canal, and Bab el-Mandeb.
Supply chains are under pressure (including tech-related).
Gas prices are up, and may impact consumer spending on discretionary items.
Consumer sentiment at a 3-month low, housing under pressure.
Bond yields have increased and may impact consumers, businesses, and equity valuations.
Recent U.S. bond auctions have been disappointing, with concerns around foreign demand, inflation, volatility, liquidity, and a broader supply/fiscal overhang.
Private credit is under pressure and may impact lending liquidity throughout the system (public and private).
1-year inflation expectations have spiked higher, while 2-, 5-, and 10-year expectations have also increased.
The FOMC is likely on hold, if not leaning toward a hike (based on market expectations).
Recession probabilities are increasing as the conflict drags on.
International regions dependent on imported energy are struggling.
AI profitability concerns are increasing just as earnings season begins, also buyback blackouts are starting.
Initial signs of economic deceleration and potential labor disruptions (so far, economic activity remains positive, and labor remains in the “low-hire, low-fire” category).
Tariff and trade policy remain uncertain.
Stocks have declined and are significantly oversold short-term, but not on a longer-term basis.
Extreme pessimism for equities is in place.
Volatility is elevated, and gamma is negative.
SPX earnings expectations are increasing for CY 2026.
Nasdaq and Dow are near correction territory.
What might turn this negativity around?
Any credible de-escalation with Iran.
Oil stabilizes or falls.
A soft-but-not-collapsed jobs report on Friday (a moderate payroll number could support the idea that the economy is cooling enough to reduce rate pressure without signaling recession).
Labor market stays stable without reheating.
Treasury market calms down (better auction demand, narrow spreads, and lower volatility).
FOMC rate hike probabilities move lower, potentially back into rate cut territory.
Continued strength in earnings expectations (and solid guidance in upcoming earnings reports).
Renewed strength in AI-related names (along with a rebound in cyclicals and industrials).
Relief of tariff and trade pressures.
Any of these could lead to the market squeezing higher simply because investors are leaning defensively and pessimistically at this point.
Below, I’ve updated the charts from last week, as they remain quite relevant.
The percentage of Russell 3000 stocks below the 50-day moving averages is below the 30% lower bracket. The model appears to be waiting for a reversal back up through that level to trigger a bullish signal. The big-picture message: This indicator seeks to be invested when breadth is recovering from weak levels (buying the washout) and defensive when broad participation is deteriorating from strong levels. The current low reading suggests the market is in a fragile state, but if breadth snaps back, it could generate a buy signal.
Figure 2: Signs of a trend breakdown appearing among several of our indicators. Note that breadth dropping below 7% would indicate a panic-level washout that could override a bearish signal.
The McClellan Oscillator, a short-term breadth momentum gauge, has rebounded from last week's lows. The Zweig Breadth Thrust has reversed from 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 selloffs can still produce temporary false bottoms.
Figure 3: Short-term oversold conditions are in place.
The 50-day breadth is 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 (we’re seeing initial signs), 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 4: Shorter-term breadth measures oversold.
Excessive pessimism is in place. Historically, this has often led to relief rallies.
Figure 5: Sentiment is pessimistic.
Positioning is still neutral overall. For example, we haven’t seen capitulation from vol-targeting strategies.
Figure 6: 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.
However, based on the DBMF exposure below, this managed-futures fund used to be mostly long stocks but has now turned meaningfully short the S&P 500. It shows that DBMF’s current systematic positioning is strongly negative on SPX. In fact, it is more negative than the 2025 Liberation Day lows.
Between the vol-targeting funds and DBMF, sophisticated systematic strategies are de-risking but haven't capitulated across the board.
Figure 7: 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 good news is that the steep decline from 1Y → 2Y → 5Y → 10Y suggests the bond market views this as temporary rather than structural. When 1Y breakevens were 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. What does this mean for the broader picture:
This is the single most important counterpoint to the bullish breadth and sentiment signals. Many 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 rate cuts 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
Figure 8: 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 is the saving grace — it suggests this is still a tradable correction rather than a structural regime change, but only if the energy shock's impact proves truly temporary, as the bond market currently assumes.
The table below illustrates current market expectations for WTI Oil prices based on current futures contract pricing.
Investors are looking for ~$77 by the end of this year (up from $73 last week), $71.76 by the end of 2027 (up from $70), and $69.32 by the end of 2028 (up from $67).
Our view is that current production exceeds demand and that prices will fall more quickly once supply chains are unclogged. But expectations for future oil prices are rising.
Figure 9: 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 are near where they were last week, well below the peak.
Figure 10: Crude oil managed money short positions have been meaningfully reduced from the peak. A contrary opinion indicator.
OAS for Investment-Grade Corporates remains relatively contained amid significant bond market volatility.
Figure 11: 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.
Forward earnings estimates for the S&P 500 continue to ramp higher, primarily due to the energy sector’s windfall.
Figure 12: Our work shows that “Big Bear Markets” don’t typically occur in an environment of rising earnings. We understand the lag often associated with 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 +17.1%. Note the increase in the Energy sector’s outlook—that number was negative just a few short weeks ago.
Figure 13: FactSet shows that earnings expectations remain 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 14: 2-year Treasury versus the Fed funds rate shows that market participants aren’t anticipating a rate cut soon.
The NDR Economic Timing Model remains in the Moderate Growth zone. The model is not flashing “hard landing” right now. It is closer to saying the economy is still expanding enough that recession odds are contained, even if growth is no longer as clean or as easy as it looked earlier. That fits with other recent commentary noting that financial conditions and credit spreads are not behaving as they would if the market were expecting a near-term recession.
Figure 15: The weight of the evidence indicates that the U.S. economy continues to chug along.
The NDR Inflation Timing Model remains in the Moderate Disinflation zone. That suggests inflation pressure is still easing overall, but not fast enough to imply a clean return to 2% or immediate all-clear for the Fed. NDR’s inflation model is constructive versus an overheating scenario, but it is not signaling rapid disinflation. It points more toward slower, bumpier cooling than a swift drop back to target.
Figure 16: Inflation is still contained, so far.
U.S. Economic Releases:
Last week’s data supported continued economic growth (Flash PMIs) and growing inflation concerns (UoM Inflation Expectations, Import Prices, Unit Labor Costs).
This week: A lot of data.
Powell speaks on Monday.
JOLTS on Tuesday.
Wednesday: Retail Sales, ADP Non-farm Employment, ISM Manufacturing PMI, Business Inventories.
Unemployment claims on Thursday and Challenger Job Cuts.
Friday, MARKETS CLOSED, and yet, the Employment numbers will be released.
Figure 17: Economic release calendar. Source: Forexfactory.com
Bottom Line: The market is in a messy middle ground: macro risks have clearly risen, but the evidence does not yet point to a full-blown recession or major bear market. The biggest negatives are war-driven energy risk, higher yields, weak bond auctions, rising inflation expectations, pressure on consumers and private credit, and a Fed that is unlikely to cut soon. At the same time, breadth, sentiment, and some short-term momentum indicators are very oversold, which often sets up a tactical rebound. Earnings expectations are still rising, credit spreads remain relatively contained, and the economy is still in a moderate growth / moderate disinflation regime rather than a hard landing. So, the message is: cautious, not catastrophic. In the near term, the market could bounce sharply if tensions in Iran ease, oil falls, Treasuries calm down, and jobs data come in soft but not recessionary. But inflation breakevens are the main warning that any bounce may be limited.
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.
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.
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Sources:
https://www.3fourteenresearch.com/
This material is for educational purposes only. Further distribution is prohibited without prior permission. Please see the information on Disclosures 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 2026 Day Hagan Asset Management. Data sources: Day Hagan Asset Management, 3Fourteen Research, J.P. Morgan, Goldman Sachs, Barchart, StreetStats, Atlanta Fed, St. Louis Fed, Koyfin, Yardeni, MarketEar, S&P Global, SPDR, FactSet.
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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.
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.
Breakevens: Breakevens are the inflation rate implied by bond markets: the yield difference between a nominal Treasury and an inflation-protected Treasury of the same maturity.
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.
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