Day Hagan Catastrophic Stop Update March 31, 2025
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The Catastrophic Stop model level declined to 51.43% from 56.43% last week. The decline resulted from the “High Yield and Emerging Market Bond Factor” reversing back to neutral from bullish (reversal occurred March 26). Technical measures calling U.S. Stock/Bond Relative Strength, Short-term Trend, Intermediate-term Trend, and High Yield OAS spreads are bearish. Conversely, global breadth statistics, sentiment, measures of economic activity, and equity demand remain bullish. Long-term oversold mean reversion indicators and High Yield/EM Bond breadth are neutral. Our indicators have not yet registered an intermediate-term breadth thrust. However, breadth thrust signals don’t necessarily need to occur for the markets to mark a low; but they do increase the probability that a broader-based uptrend will be sustainable.
The weight of the evidence suggests that the current decline is not expected to extend into a significant downtrend. Of course, if our model flips negative, signaling more substantial problems, we will raise cash immediately.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return Index.
Short-term oversold conditions have been registered, with the S&P 500's 10-day ROC declining below the 5-month lower Standard Deviation band. Holding the SPX 5,500 level will be an important test. To reiterate, this is a short-term view.
Figure 2: S&P 500 10-day ROC is oversold. However, we need to see our intermediate-term measures stabilize as well.
Overall, sentiment still indicates excessive pessimism. The CNN Fear Greed Composite includes the “S&P 500 moving average (125-day), breadth (new highs/new lows), put/call ratios (5-day average), market volatility (VIX vs. 50-day MA), Safe Haven Demand (difference in 20-day stock and bond returns), and Junk Bond Sentiment (yield spread).”
Figure 3: Sentiment is excessively pessimistic. A reversal back above 40 would be bullish.
Although pessimism is rife, Smart Money Confidence is spiking higher. Historically, peaks in Smart Money Confidence have occurred near market lows. Smart Money indicators include “put/call and open interest ratios, commercial hedgers' positions in equity index futures, and stock/bond relative strength.”
Figure 4: The Smart Money is getting more bullish (based on positioning). Levels are commensurate with what we saw near the 2020 lows and higher than those at the 2024 (August 5) low. (Source: Sentimentrader)
Earnings are coming into focus with the end of Q1. Estimates have been moving lower. FactSet notes that “107 S&P 500 companies have issued quarterly EPS guidance for the first quarter. Of these companies, 68 have issued negative EPS guidance and 39 have issued positive EPS guidance. The number of companies issuing negative EPS guidance is above the 5-year average of 57 and above the 10-year average of 62. On the other hand, the number of companies issuing positive EPS guidance for the fourth quarter is below the 5-year average of 42 but above the 10-year average of 38. As a result, the percentage of companies issuing negative EPS guidance for Q1 is 64% (68 out of 107), which is above the 5-year average of 57% and above the 10-year average of 62%.” Typically, negative preannouncements happen early in the earnings season.
3Fourteen Research shows that the current path of earnings is more comparable to periods when earnings revisions moved lower without a recession within 12 months versus those times when negative earnings revisions happened in the face of a recession. However, this is a critical period, as you can see by the potential “fork in the road” illustrated in the chart below.
Figure 5: Earnings estimates trends can help forecast our recession probabilities. If earnings turn significantly lower, we will increase our recession probability odds.
A portion of the earnings reductions has likely resulted from the continued high level of uncertainty around government policies. Analysts incorporate probabilities into their modeling, and when diverse outcomes are assigned higher probabilities, the rising probability of the bad outcome waters down the probability of the good outcome. Uncertainty fuels all of this.
We’ve been featuring the Economic Policy Uncertainty Index for the United States, illustrating the building uncertainty.
Figure 6: Economic Policy Uncertainty Index
3Fourteen Research (with whom we collaborate on our indicators and models) takes it a step further. They show that historically, “Policy uncertainty continues rising in 10% corrections that have fallen further.” In other words, if we don’t start to see a reversal in policy uncertainty, it could be problematic for any relief rally.
Figure 7: Historically, if policy uncertainty doesn’t abate, declines have tended to extend. (Note: This is why the market spikes higher on news that seems to alleviate uncertainty.)
Unfortunately, policy uncertainty isn’t limited to the U.S. As an aside, I’ve heard folks say that “there’s always policy uncertainty.” However, judging by the chart, it hasn’t been this extreme since 2020 when the world was effectively shut down.
Figure 8: The GDP-weighted average Economic Policy Uncertainty Index of 20 countries shows that most countries do not have a clearly defined path for fiscal, monetary, and legislative policies. Removing ambiguity should support equities.
A positive underpinning is economic liquidity, defined by year/year M2 growth (SA).
Figure 9: Money supply growth is constructive.
The St. Louis Fed Financial Stress Index continues to register “below average risk” levels for the financial markets.
Figure 10: While uncertainty rules the day, the hard data indicates that stress underneath the hood is relatively tame (though increasing).
Confirmed by the S&P 500’s 3-month volatility index not breaking out on the upside.
Figure 11: Equity volatility not showing panic.
Lastly, April 2 is looming large in investors’ minds, with most hoping for improved visibility on the tariff front. We are also looking to this Friday’s employment report for signs that economic activity, while decelerating, remains positive.
Figure 12: Seasonality may provide a boost as we enter April. Even so, earnings guidance will be key.
Bottom Line: The Catastrophic Stop model has not (yet) signaled that it’s time to significantly reduce exposure. Nonetheless, our sector work has been reducing risk in the portfolio by increasing exposure to defensives while reducing exposure to higher Beta sectors. Both model series provide a quantitative, unemotional appraisal of risk and concrete actions to achieve our desired risk/reward profile. Currently, we view the secular uptrend as intact, but our models have lowered the portfolio’s volatility as a first step should downside risks accelerate.
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
This material is for educational purposes only. Further distribution is prohibited without prior permission. Please see the information on Disclosures and Fact Sheets 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 2025 Day Hagan Asset Management.
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.
Earnings Per Share (EPS) - is a commonly used measure of a company's profitability. It indicates how much profit each outstanding share of common stock has earned. Generally speaking, the higher a company's EPS, the more profitable it is considered to be.
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