Day Hagan Catastrophic Stop Update May 26, 2026
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The Day Hagan Catastrophic Stop model increased to 86.4% from 77.3% last week. The model continues to indicate that investors should maintain their benchmark equity allocation.
Figure 1: It is important to note that many of the indicators remain poised to revert to neutral, or sell, if the market decisively reverses.
The model increase resulted from High-Yield Bond Breadth reaching a minor oversold condition and then reversing slightly higher. If the indicator’s upmove falters and it declines back below -10%, it will reverse to a sell signal. As detailed last week, failed buy signals have historically been negative, so we are watching this closely.
High-yield bonds remain a useful canary in the coal mine for risk assets. Because HY credit is tied to many of the same underlying forces as equities—corporate health, default risk, liquidity, and investor risk appetite—HY breadth often leads or confirms equity moves, particularly near turning points.
Figure 2: A move back below -10%, especially if sustained, would be a significant warning flag.
Corporate OAS spreads remain near the low end of long-term ranges because fundamentals still look solid: earnings are resilient, default rates are contained, balance sheets are manageable, and investor demand for yield remains strong. All-in yields appear to be attractive even with tight spreads, drawing buyers from pensions, insurers, and global investors. Limited net supply in higher-quality credit, expectations of eventual Fed cuts, and low equity volatility also support risk appetite, keeping compensation for credit risk compressed overall today.
Figure 3: High-yield bond OAS at the lower end of the long-term range.
Investor sentiment remains optimistic because growth has slowed but not broken, earnings are holding up, credit spreads remain tight, and investors still expect eventual Fed easing. AI-related capex, strong buybacks, ample liquidity, and resilient labor data reinforce the soft-landing narrative. Sentiment would likely reverse if inflation reaccelerated, the Fed turns more hawkish, unemployment rises materially, earnings revisions weaken, credit spreads widen, or Treasury yields rise enough to pressure valuations and liquidity. A geopolitical or funding shock could also quickly shift optimism back to pessimism.
Figure 4: Near-term, sentiment is excessively optimistic. A reversal back below 70 would generate a sell signal.
Breadth improved as last week’s rebound broadened beyond mega-cap leadership, helped by easing oversold conditions, stable earnings expectations, and dip-buying in cyclicals and smaller stocks. More Russell 3000 names moved back above their 50- and 200-day averages, showing better participation. However, the bounce was not decisive enough to confirm a new leg higher. Sustained improvement requires expanding 200-day breadth, stronger equal-weight performance, and leadership outside defensives and large-cap growth. Otherwise, it remains a relief rally for now.
Figure 5: Market breadth is neutral. A decline below 30 (50-day MA) would likely indicate oversold conditions.
The chart shows the S&P 500 Total Return Index in a strong uptrend, above rising 50- and 200-day averages, but short-term momentum is stretched: 14-day RSI is 71.5 and smoothed RSI is near 69, around overbought territory. Other OBOS gauges likely send similar caution: high percent above short-term moving averages, elevated stochastic readings, strong advance/decline thrust, and compressed put/call fear. This does not signal a top, but suggests near-term upside is less favorable and consolidation risk increased.
Figure 6: SPX RSI reversing from extended levels near-term.
The chart shows that volatility-target strategies have rebuilt equity exposure from oversold levels toward neutral. Systematic demand is improving, but positioning is no longer deeply underweight, so future buying support may be more moderate overall.
Figure 7: Volatility-targeting funds have rebuilt equity exposure. Positioning could provide incremental support for equities; it does not suggest a major forced-buying setup.
This chart shows DBMF’s estimated S&P 500 exposure has swung sharply from deeply short in April to about +31.5% long, as the S&P 500 rallied to new highs. That suggests trend-following and managed-futures positioning has flipped from an equity headwind to a tailwind. The risk is that much of the mechanical buying may already have occurred, so continued support likely requires further upside momentum rather than just stabilization.
Figure 8: Managed futures and trend-following funds likely have re-established their equity allocations at this point.
The chart shows a renewed surge into cash and money-market ETFs, with 5-day inflows of $4.5 billion above the 95th percentile, even as the S&P 500 sits near highs. That suggests investors are raising liquidity rather than fully embracing risk.
Figure 9: Investors are raising cash. This somewhat offsets the sentiment composite's overly optimistic message.
Equity bull markets are healthier when price gains are supported by improving earnings. The S&P 500 is making new highs, and forward earnings are as well, so the rally is not purely a multiple expansion. The chart suggests the fundamental backdrop is currently confirming the market advance.
The main caveat: earnings revisions this strong can become a high bar. If estimates stop rising or begin to flatten, the market may become more vulnerable because expectations are now elevated.
Figure 10: Earnings growth expectations remain constructive. The highest 3-month increase in earnings expectations since at least 1990.
Interestingly, the 2026 and 2027 cycle composites suggest the uptrend could extend well into 2027, though some pre-midterm choppiness may occur along the way. Keep in mind that CY 2026 S&P 500 earnings are expected to be up 22.1% y/y and 2027 earnings up another 15.8% y/y.
Figure 11: Earnings are the key to the cycle composites' expectations being correct.
Figure 12: 2027 S&P 500 Cycle Composite
Breakeven inflation rates likely fell because investors became less worried about future inflation. Energy prices eased, reducing the market's risk of a lasting inflation shock. At the same time, Treasury yields were rising more because of real-rate pressure, heavy bond supply, and term premium — not because inflation expectations were rising. Put simply, inflation fear cooled, but bond-market supply and duration concerns remained.
Figure 13: Longer-term breakeven rates continue to indicate that inflation is “well anchored.”
The 2-year Treasury relative to the Fed funds rate suggests a Fed funds rate hike is becoming more likely. I’d be surprised if that happened, but we now have to incorporate that possibility into our outlook.
Figure 14: Markets are pricing the next Fed action as a hold, with roughly 99.9% odds of no change at the June 17 meeting; later-2026 odds have shifted toward a possible hike. The message: cuts are no longer the base case; inflation, oil, and yields have made a hike a real tail risk again.
The 2-year Treasury is rising mainly because markets are repricing the Fed path higher, with fewer cuts and tighter-for-longer risk. The 10-year story is broader: higher expected short rates, higher real yields, inflation uncertainty, fiscal supply concerns, and a larger term premium. Mortgage convexity hedging can amplify the move, especially in the 5- to 10-year sector, as rising rates extend mortgage duration and force duration selling. Curve steepening is therefore a duration risk and inflation/fiscal premium story overall.
Figure 15: Decomposition of 2- and 10-year Treasury yields.
The chart shows Japan’s 10-year yield has surged to 2.75%, narrowing the US-Japan spread to 1.81%, near the lower Bollinger band. That reduces the incentive for Japanese investors to invest in yen and buy higher-yielding Treasuries. As JGBs become more attractive, demand for U.S. duration can weaken while repatriation or hedge unwinds add Treasury supply. The carry trade is therefore less supportive of U.S. bonds and can push global yields higher by reducing demand and triggering forced selling.
For this to reverse, the US-Japan yield spread needs to widen again, or the currency-hedged return on Treasuries needs to improve.
That likely requires some mix of: lower Japanese yields, via slower inflation or a less-hawkish BOJ; higher U.S. yields relative to JGBs, if the Fed stays restrictive while Japan stabilizes; and a more favorable yen/currency-hedging backdrop. If hedging costs fall or the yen weakens, Treasuries may become more attractive to Japanese buyers again.
Figure 16: The carry trade is less helpful for U.S. bonds.
Flash PMIs show a two-speed developed-market economy. Manufacturing is generally holding up better, helped by stock building and supply-chain disruptions, while services are weakening across the U.S., Europe, the U.K., Japan, and Australia. The message is stagflationary: growth momentum is fading, but input costs and price pressures remain elevated. That complicates central-bank easing, because weaker demand argues for cuts, while sticky inflation and tariff or energy-related cost shocks argue for patience. Overall, recession risks are rising globally now.
Figure 17: U.S. growth is holding up while other developed markets are struggling. We’re watching to see whether the international slowdown spills over into the U.S.
U.S. Economic Releases:
Last week’s data were mixed, but it leaned stagflationary. Housing surprised to the upside, with starts and permits above forecasts, while jobless claims remained low. However, Philly Fed manufacturing collapsed, services PMI softened, consumer sentiment was revised lower, and inflation expectations rose. Manufacturing PMI improved, likely helped by stockpiling, but weaker services and confidence point to slowing demand. Overall, growth remains resilient in pockets, but inflation concerns and policy uncertainty are keeping the Fed cautious.
PCE data on Thursday.
The “second” guesstimate for Q1 GDP is also expected on Thursday, with economic activity expected to be revised higher and the price index revised lower.
Figure 18: Economic release calendar. Source: Forexfactory.com
Bottom Line: The Day Hagan Catastrophic Stop model rose to 86.4% from 77.3%, supporting a benchmark equity allocation, but several indicators remain vulnerable to reversal. High-yield breadth improved after a minor oversold condition, though a drop back below -10% would be a warning. Credit spreads remain tight, earnings expectations are constructive, and market breadth has improved, confirming the equity uptrend. However, sentiment is excessively optimistic, RSI is stretched, and systematic equity buying may already be largely rebuilt. Cash inflows suggest investors are still cautious. Macro risks are rising: breakeven inflation eased, but Treasury yields are being driven by real-rate, supply, term-premium, and Japan carry-trade pressures. The Fed is expected to hold in June, though the risk of a hike has re-emerged. Flash PMIs show slowing global growth with sticky cost pressures, creating a stagflationary backdrop. Upcoming PCE and GDP revisions are key.
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Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
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Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, and bonds are subject to availability and changes in price. Bond yields are subject to change. Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest, and credit risk.
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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.
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) – survey-based economic indicators that 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.
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.
Catastrophic Stop model — Proprietary model used to indicate suggested equity exposure levels.
CDS — Contract designed to transfer credit risk of a referenced borrower.
Success rate — Percentage of historical observations producing a positive stated outcome.
High-Yield Bond Breadth: High-Yield Bond Breadth measures how widely spread tightening or weakening occurs across junk bonds; broad improvement often signals a stronger risk appetite.
Russell 3000: The Russell 3000 Index measures the performance of approximately 3,000 largest U.S. public companies, representing about 98% of the investable U.S. equity market.
PPI: PPI, or the Producer Price Index, tracks average price changes producers receive for goods and services, offering an early signal of inflationary pressure.
DBMF: DBMF is an actively managed futures ETF that aims to mirror hedge fund trend-following strategies by using long and short futures positions across stocks, bonds, currencies, and commodities.
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