Day Hagan Catastrophic Stop Update May 27, 2025
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The Catastrophic Stop model is unchanged from last week at 77.27%. The model recommends that investors maintain their equity benchmark exposure.
Measures of Breadth Thrust, Oversold Mean Reversion, Sentiment, Volume-adjusted Supply/Demand, Stock/Bond relative strength, High-Yield Credit Spreads (OAS), High-Yield Bond Breadth, and Baltic Dry Index rate trends remain positive.
Technicals
Sentiment: The Day Hagan Daily Market Sentiment Composite has moved further into the excessive optimism zone. As written last week, “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 “thrusts” after significant declines are normal.
Positioning: We last featured this chart on May 5, writing “Smart Money Confidence is rolling over after reaching the highest level in 18 years, which is constructive. Like the other longer-term indicators in our universe, there is a way to go before this indicator generates a sell signal.” The composite shows that Smart Money is less confident but has not yet crossed the sell threshold. Like the DH Sentiment Composite, a reversal from extreme positioning would generate the signal.
Figure 2: Smart Money Confidence is less bullish, but not (yet) on a sell.
Positioning: Below are several more measures we use to evaluate how stretched the markets may be. All indicate that markets are neither “overly pessimistic” nor “overly optimistic.” This is a common theme among both our survey-based measures and asset-based measures.
Figure 3: The best word to describe the technical environment is “Neutral.” (Source: MarketEar.)
Breadth Thrust: Among the hundreds of diverse indicators that we monitor is the 5-week rate of change of relative cumulative breadth for the Russell 3000. As shown on the chart, this indicator has historically generated buy signals after significant lows have formed. This information is particularly useful when making longer-term allocations. While the signals can be delayed, they help provide background information on the likelihood that a major low is in place and/or the probability that another major downturn is imminent. Note that returns following buy signals have historically returned more than double the average (mean) market return.
Figure 4: Several “lookback” technical indicators confirm an established trough.
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 5: The upper and lower range levels are 5,572 and 6,212 for the August 15th expiration. For the 6-20-2025 expiration, the levels are 5,728 and 6,056. (Note: Implied Volatility is lower than Historic Volatility. This indicates that option prices are reflecting lower expected future price swings compared to recent actual price movements. It may also indicate that options are undervalued.)
Operating Environment
Earnings: Earnings growth expectations have moved higher following the April decline and reduced tariff tensions.
Figure 6: Earnings expectations showing some lift.
Earnings: Currently, 64.7% of S&P 500 companies have positive 3-month percent changes in forward earnings. We added the dashed red line at 60 as it appears to be an interesting threshold since 1998. Similarly, 71.6% of S&P 500 companies have positive 12-month changes in forward earnings, and the 70 levels have offered support and resistance. (Source: yardeni.com)
Figure 7: Three-month earnings estimates are showing signs of recovery. This is constructive in the near term.
Figure 8: Looking out over the next 12 months, positive earnings revisions have stalled. While the absolute level of 71.6% is acceptable, directionally, this is a concern, indicating that investors are becoming less optimistic about the coming 12 months.
Economic Activity: We still rate U.S. economic activity as moderate, which has historically been relatively constructive for equities. Last Thursday, the May U.S. S&P Global Flash Manufacturing PMI and Flash Services PMI both came in at 52.3, above expectations of 49.9 and 51.0, respectively. This was the highest in three months for manufacturing and showed the strongest improvement in business conditions since June 2022. (Note: There was some inventory build we are monitoring.) The Services PMI bounced off the 17-month low of 50.8 last month. New orders were strong, even though foreign purchases declined significantly (the most on record outside of the pandemic). The net takeaway was that economic activity showed some signs of stability, but it remains below trend, and any continued weakness in the employment (hiring plans) data will be closely watched.
Note: The Citigroup U.S. Economic Surprise Index turned positive, and as of May 26, it is +6.0. China, Emerging Markets, Latin America, Europe, the U.K., and Australia are also positive. Japan, Canada, Sweden, and Switzerland are among the countries with negative economic surprise indexes.
Figure 9: Economic activity is still muted but positive. Prices paid spiked higher, due to front-loading orders and tariff-related cost increases. Manufacturing input prices increased at the highest rate, but Services prices were also up.
Fed GDPNow: The Fed GDPNow real GDP estimate for Q2 2025 is 2.2% (as of May 27).
Figure 10: Fed GDPNow Real GDP estimate. Interestingly, the Blue-Chip Consensus is also increasing.
Inflation: Inflation pressures have increased lately. However, we remain of the view that the broader trend remains down. As shown in the chart above, prices paid have reacted to the tariffs; however, inflation remains well anchored. The 5-year breakeven inflation rate is 2.4%.
Figure 11: 5-year breakeven inflation rate showing a recent increase that will likely abate as tariff negotiations continue.
Inflation: Examining industrial commodity prices within the PPI, we observe that through April, commodity price increases were 0.0% year-over-year. (The next update is on June 12.) The Producer Price Index (PPI) for Industrial Commodities measures average price changes received by producers for goods like chemicals, metals, and machinery. It reflects inflation at the wholesale level, influencing manufacturing costs and broader economic trends.
Figure 12: Commodity price pressures at the wholesale level through April were subdued. Interestingly, the S&P GSCI (Goldman Sachs Commodity Index) was 440.59 10 years ago vs. 535 last Friday for a 1.93% 10-year average annualized return. The GSCI is not showing significant price pressures at the wholesale level.
Upcoming Reports we’ll be watching closely:
Wednesday: FOMC Meeting Minutes (Will the Fed ride to the rescue with rate cuts if need be?), NVDA earnings
Thursday: GDP Second Release (exp. -0.3%, a positive print would be a surprise for the market), GDP Price Index (exp. 3.7%), unemployment claims (exp. 229), several FOMC members speaking
Friday: PCE data, consumer sentiment, and we’ll be watching inventory data closely
Conclusion: Short-term resistance and overbought conditions suggest a consolidation phase as market momentum rebuilds. However, intermediate-term positioning remains neutral, with Q1 earnings easing investor concerns. In fact, earnings forecasts have been drifting higher (on average). As discussed last week, despite elevated recession mentions (the highest since Q4 2022, according to FactSet), a constructive economic backdrop and declining inflation support further upside. We remain fully invested, guided by our quantitative model signals, but will raise cash if indicators turn negative.
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 time that is convenient for you.
PS: Updated 2025 Cycle Chart
Figure 13: S&P 500 Cycle Composite for 2025 with 2025 Progress.
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.
Russell 3000 Value Index - Is a market-capitalization weighted equity index maintained by the Russell Investment Group and based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform by including only value stocks.
Purchasing Manager Indexes (PMI) – Purchasing Managers’ Index is a survey-based economic indicator designed to provide a timely insight into business conditions.
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.
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