Day Hagan Catastrophic Stop Update May 19, 2025
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The Catastrophic Stop model increased to 77.27% from 72.73% last week. The model recommends that investors maintain their equity benchmark exposure.
As discussed last week, the Breadth Thrust, Oversold Mean Reversion, Sentiment, Volume-adjusted Demand/Supply, Relative Stock/Bond Strength, High Yield OAS, High Yield Bond Breadth, and Baltic Dry Index Factors remain positive. However, the Longer-term Trend Factor has now moved to neutral from negative, causing the model to increase. The net result supports the view that a major bear market is unlikely to develop in the near term.
Technicals
Sentiment: The DH Daily Market Sentiment Composite has entered the "excessive optimism" zone. This is not unusual after significant declines; historically, the model has often shown extreme pessimism that quickly transitions into excessive optimism. We interpret this rapid movement similarly to a "breadth thrust." With sentiment indicators, we go with the flow until it reaches an extreme and reverses. In other words, we will rate this indicator as neutral until it reverses back below 70.
Figure 1: Sentiment is getting more optimistic but hasn’t yet reversed.
CNN Fear/Greed: Interestingly, the CNN Fear Greed index has just barely exceeded the excessive optimism threshold of 70. Note: The Day Hagan composite includes daily surveys of retail and institutional investors to determine positioning levels and supply/demand trends.
Figure 2: CNN Fear/Greed model barely in the excessive optimism camp.
Breadth Thrust: There have been several instances of breadth thrust indicators triggering buy signals since the April 9 massive up-day. As detailed in the chart below, when DeGraaf and Zweig breadth thrust indicators generate buy signals within one month of each other, subsequent six- and twelve-month returns have been 100% positive since 1962, with average returns of 20.7% and 29.7%, respectively. (Source: 3Fourteen Research.)
Figure 3: Putting long-term money to work following “DeGraff plus Zweig” breadth thrusts has been rewarding. Note that drawdowns are also palatable.
Positioning: DBMF’s equity exposure, mainly via S&P 500 futures, reflects an estimate of effective market exposure, adjusted for leverage and long/short netting. For example, one can estimate equity allocation by comparing DBMF’s beta (-0.20) to an equity index’s beta (1.0), suggesting low or negative net exposure. Low sensitivity to equity market movements indicates limited allocation. Note that long/short strategies may result in near-zero net exposure despite significant gross exposure.
Figure 4: Systematic and algo traders are likely still underweight.
Vol-targeting Funds: Volatility Targeting funds are also likely underweight equities. JPM notes that “on the aggregated level, positioning has moved up from -1z to -0.2z, close to neutral and the 39th percentile dating to 2015.” (z = Standard Deviation.) Further, “While we acknowledge that the risk/reward for the SPX may be close to neutral, we think there is more upside to this market before we get to a point where we think people will bet bearish which would be highlighted by net-bullish positioning at a time when the macro data begins to see material declines.” DB notes that mega-cap growth and tech positioning are at the 19th percentile (since 2009).
Figure 5: While sentiment has moved to excessive optimism levels, actual equity allocations have upside before being overweight. This is similar to the divergences we see in “soft” economic data versus “hard” data.
Gamma: The S&P 500 (SPX) is in a low positive gamma regime, with dealers hedging to dampen volatility. Key levels to watch: resistance at 5950–6000, support at 5900, and a modest gamma flip at 5887. Above 5950, positive gamma builds, supporting dips; below 5900, negative gamma risks selling pressure. CTA triggers at 5875–5900 could drive upside if cleared.
“Gamma Exposure (GEX), also known as Gamma Levels, measures the change in delta exposure for options based on changes in the underlying price. Gamma exposure highlights important price levels with significant gamma based on market positioning and open interest. These elevated values reflect where market-makers may need to hedge to mitigate their risk, offering important levels of support and resistance. By default, gamma exposure levels are calculated on four nearby expirations, based on a 1% move of the underlying security using gamma and open interest. Gamma exposure is calculated and updated throughout the day. Source: Barchart.”
Figure 6: Call and put gamma exposure neutral.
Figure 7: Open interest (OI) building at SPX 5,900 and 6,000.
Still looking for a boost from foreign demand: Lastly, from a supply/demand vantage point, we’ve been discussing the possibility that a stronger U.S. dollar may encourage more foreign investment in the U.S., as there have been concerns that the international community would eschew our products and services. Interestingly, the latest Treasury International Capital (TIC) report as of March 2025 shows foreign net purchases of long-term U.S. securities at $183.2 billion, above the 12-month average of $126.8 billion (calculated from available TIC data, January 2024–March 2025). Private foreign investors bought $146.0 billion, and official institutions purchased $37.3 billion, both exceeding their respective averages of $111.3 billion and $15.5 billion. Treasury bill purchases ($98.3 billion) also surpassed the 12-month average of $40.7 billion, indicating higher-than-average foreign buying. While the Moody’s downgrade is pressuring the U.S. dollar and rates (initial reaction was a bearish steepening of the yield curve), we expect the significant negativity to abate quickly.
Figure 8: The death of foreign purchases of U.S. Treasury Securities has been greatly exaggerated, even in the face of the Moody’s downgrade (better late than never?). Note: China often holds U.S. Treasuries via Belgium (notably through Euroclear), with estimates of hundreds of billions in holdings. This custodial arrangement obscures precise attribution, but Belgium’s outsized Treasury holdings relative to its economy support this pattern.
Expected Move based on Options Pricing: “The Expected Move, which is also referred to as Implied Move, reflects the price range that a security is expected to move from its current price. The Expected Move is calculated based on 85% of the value of the at-the-money straddle. The range as predicted by the expected move can be used to target high and low prices and is especially useful around earnings season. The chart reflects the prior six months of price activity, followed by the expected move based on the next two weekly and monthly options contracts. Source: Barchart.”
Figure 9: The upper and lower range levels are 5,620 and 6,277 for the August expiration.
Operating Environment
Earnings: Q1 earnings came in well above expectations. FactSet notes that with regard to Q1 2025 earnings, based on 92% of S&P 500 companies reporting, 78% beat EPS estimates, and 62% beat revenue. Blended earnings growth is 13.6%, marking two quarters of double-digit growth. Ten sectors exceeded March 31 estimates (7.1%) due to EPS surprises. For Q2, 42 companies issued negative EPS guidance, and 36 issued positive guidance. The S&P 500’s forward P/E is 21.4, above 5-year (19.9) and 10-year (18.3) averages. Revenue growth was a positive 4.8% y/y.
They also note that the “Negative Guidance Percentage for Q2 is Below Recent Averages.” We continue to view Q2 earnings as a pivot point for the year, with Q2 y/y growth expected to be 4.8%, followed by Q3 at 7.0% and Q4 at 6.1%. Estimates for calendar year 2026 are 13.4%.
Figure 10: If earnings growth estimates for 2026 hold up, it would support the markets getting through SPX 6000. However, we note that since March 31st, estimates have drifted lower, which isn’t unusual. We’re keeping an eye on revision momentum.
Economic Activity: We continue to view economic activity as moderate but positive. The U.S. dollar is a good barometer of expectations globally. The dollar index has recently declined, moving further from last week’s one-month highs due to rising concerns over the US fiscal outlook. Moody's downgraded the US credit rating from Aaa to Aa1, highlighting increasing government debt and a widening budget deficit. This situation worsened following a congressional committee approving President Trump’s tax-cut legislation, which lacks spending offsets. Despite criticism, the administration claims the cuts will spur growth and revenue. Markets now expect two Fed rate cuts this year, anticipated in September and December. Regarding inflation, we continue to see levels heading toward the Fed’s target over the course of the year.
Figure 11: The U.S. dollar index rebounded from its April 21 lows but has seen recent weakness. The index is currently sitting on top of its 21-day MA.
Upcoming Reports We’ll Be Watching Closely
Tuesday: Six FOMC members speaking
Wednesday: Crude oil inventories
Thursday: Flash Manufacturing and Services PMIs. Potentially identifying levels of pull-forward demand due to tariff concerns. Unemployment claims (exp. 230k)
Friday: Three more FOMC members speaking
Conclusion
Short-term overhead resistance and overbought levels are likely to support a period of consolidation as the market’s “energy” is rebuilt. Nonetheless, our work indicates that there is more upside potential. On a more intermediate-term basis, positioning isn’t extended, and Q1 earnings calmed investors’ nerves. The economic backdrop is constructive, though recession concerns will likely restrict forecasts to below-trend levels (FactSet notes that the number of companies citing recession on Q1 earnings’ calls is at the highest levels since Q4 2022, even though a recession never happened). Inflation pressures continue to head lower. We continue to hold a fully invested position based on our models and indicators' collective message. Should our indicators shift negative, we will quickly 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
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.
Breadth Thrust – A technical indicator which determines market momentum, signaling the start of a potential new bull market.
deGraaf Thrust Indicator – Measures the percent of stocks making new 20-day highs. A bullish signal is given when 55% or more of S&P 500 names make new 20-day highs.
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.
Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Asset Management, any of its affiliates or employees, or any third-party data provider shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. Day Hagan Asset Management accounts that Day Hagan Asset Management or its affiliated companies manage, or their respective shareholders, directors, officers, and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. Day Hagan Asset Management uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of Day Hagan Asset Management’s past recommendations and model results is not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors.
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