Day Hagan Catastrophic Stop Update November 10, 2025
The Day Hagan Catastrophic Stop model closed at 50% on Friday. The model continues to indicate that investors should maintain their benchmark equity exposure.
The model uses a systematic, weight-of-the-evidence approach combining price, valuation, economic trends, monetary liquidity, and sentiment indicators to identify periods of heightened market risk. When the model identifies elevated risk, it reduces equity exposure by up to 50% as a protective measure. Conversely, when risk diminishes, it moves back toward full investment. The model’s current 50% level suggests a neutral stance amid market uncertainty, encouraging investors to stay invested but remain cautious.
Last week, U.S. stocks broadly declined amid concerns over elevated technology valuations, the prolonged government shutdown—the longest ever at 38 days —which dampened economic data releases and consumer spending, and worsening labor reports showing a surge in layoffs not seen since 2003. Major indices like the Nasdaq led the decline, pressured by fears of inflated AI stock valuations.
Despite these headwinds, strong earnings, ongoing AI investments, a less restrictive monetary policy outlook, and renewed buybacks provide support. Positioning and flows remain constructive, though upcoming economic data releases could trigger episodic volatility.
The Catastrophic Stop model’s neutral signal aligns with this balanced outlook, urging the maintenance of current equity exposure while closely monitoring risks.
Figure 1: The Catastrophic Stop model would generate a sell signal by closing below 40% for two consecutive days. The current message is neutral, indicating investors should maintain benchmark equity exposure.
The Day Hagan Daily Market Sentiment Composite remains in the “Excessive Pessimism” zone. This is positive from a contrary opinion perspective. A reversal back above 30% would generate a fresh buy signal.
Figure 2: The Day Hagan Daily Market Sentiment Composite remains in excessive pessimism territory.
Systematic and algo-related leverage appears elevated and just above mid-range, although positioning is not overly crowded. If macro data cooperates, this could continue to support a year-end rally.
Figure 3: Positioning indicators and composites are high-neutral. The 10% Volatility Targeting equity allocation chart below suggests potential demand on the sidelines.
The S&P 500 (SPX) is currently in a positive gamma state, indicating that market volatility is likely to decelerate. Positive gamma means that market makers hedge by buying shares when prices fall and selling when prices rise, creating a stabilizing effect that tends to dampen price swings and volatility.
The "gamma flip point" for the SPX is at 6,706; if the index drops below this level, the market will shift into negative gamma territory. This change typically leads to increased volatility, as hedging activity then amplifies price movements rather than stabilizing them. Therefore, staying above the 6,706 gamma flip point suggests a more stable trading environment with less pronounced volatility spikes, while falling below it could encourage heightened volatility and larger price swings. This dynamic provides useful insights into the near-term behavior of SPX price fluctuations and volatility patterns.
Figure 4: SPX Gamma exposure by strike.
A VIX level below 20 is supportive, in our view. Note that the spike higher in mid-October was due to concerns around subprime lending (Tricolor Holdings and First Brands Group) and Bitcoin taking a hit.
Figure 5: VIX below 20 is constructive for equities.
About the government shutdown: According to JPM, “CBO estimates a permanent loss of between $7 billion and $14 billion (DH: A drop in the bucket). Current quarter real GDP growth may be negatively impacted by as much as 2%-points (DH: That is likely too pessimistic), though that would be almost entirely recovered in the next quarter (DH: This indicates a transitory, shorter-term problem unlikely to change the major trend).”
Our view is that, overall, shutdowns generate short-lived noise rather than structural change. Markets generally price them as political dysfunction rather than economic crises. Thus, while they can disrupt short-term data, weigh on confidence, and cause volatility, shutdowns have not altered the long-term trajectory of U.S. growth, inflation, or employment. Their significance is more political than economic.
Figure 6: Government shutdowns typically don’t disrupt the primary trend.
Below are the sector views we posited at the beginning of the shutdown. They continue to hold true.
Figure 7: Sectors’ likely responses to a government shutdown.
We’re keeping in mind that earnings growth remains solid. Note the expected growth into 2026 and 2027.
Figure 8: Earnings growth into 2026 and 2027 is expected to remain constructive for equities. (Source: CFRA)
Valuations for Midcaps and Small Caps are significantly lower than those of Large Caps. This may lead to broadening leadership in 2026 as investors rebalance.
Figure 9: Valuations based on 2025, 2026, and 2027 earnings expectations.
Economic data remains mixed. The ISM Manufacturing PMI fell to 48.7 in October, indicating an eighth consecutive month of contraction in the manufacturing sector, with declines in production, new orders, and inventories. Vehicle sales also weakened, and Challenger Job Cuts surged 175.3% year over year, signaling increased layoffs.
However, there were positive signs as well, with Consumer Credit rising by $13.1 billion, surpassing expectations of $10.4 billion. Additionally, Services PMIs showed mixed results, reflecting uneven activity across sectors. Overall, despite manufacturing contraction and labor market caution, broader economic releases continue to outpace expectations, suggesting moderate resilience amid ongoing challenges.
Figure 10: The U.S. Economic Surprise Index is constructive.
The odds of a Federal Reserve rate cut in December 2025 currently stand at around 70%, according to Fed Futures markets and prediction models. While the market prices in a high probability of a 25-basis-point cut at the December 10-11 Federal Open Market Committee (FOMC) meeting, some Federal Reserve officials have expressed caution due to data uncertainties stemming from the ongoing government shutdown.
Fed Chair Jerome Powell and others have indicated that further rate cuts are "far from a foregone conclusion," emphasizing a data-dependent approach and concerns about “flying blind” without timely economic reports. Despite these reservations, the cooling labor market and inflation nearing target levels support the case for easing.
Figure 11: Rate cut expectations have been dampened, but not quashed. Investors are still pricing in rate cuts through 2026. (Source: StreetStats.)
Figure 12: U.S. economic activity is constructive for equities. The Atlanta Fed’s GDPNow model estimates Q3 GDP to be 4.0% (as of 11/06). As we wrote last week, “That’s probably high, but it does indicate that activity is positive. To date, the Citigroup Economic Surprise Index is also in positive territory, indicating that U.S. economic releases have been beating estimates, on average, over the last three months.”
Upcoming Economic Releases:
Another spate of Fed Governors seeking the spotlight.
NFIB will be closely watched on Tuesday, given the dearth of economic data.
10-year auction on Wednesday, 30-year auction on Thursday.
CPI, Retail Sales, PPI, unlikely.
Figure 13: Economic Calendar for the Week.
Bottom Line: The Day Hagan Catastrophic Stop model closed at 50% on Friday, indicating a neutral stance and advising investors to maintain benchmark equity exposure. Fundamental support remains constructive: Earnings are solid, with forward guidance holding firm and broadening beyond mega-caps. AI remains a key tailwind, as large platforms continue expanding 2026 capex across semiconductors, cloud infrastructure, and high-performance networking. Inflation is easing gradually, and the Federal Reserve’s halted balance-sheet runoff points to incrementally less-restrictive policy heading into 2026. Sentiment has improved from prior extremes, flows remain constructive, and positioning sits mid-range, offering scope for upside if data stabilizes. Still, leadership remains narrow and choppy. Key risks include the ongoing government shutdown (data disruptions), soft manufacturing trends, early-year seasonal weakness, and elevated valuations, particularly in AI-linked growth. Overall, the indicators suggest staying invested while closely monitoring macro risk.
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 for you.
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 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. 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.
Disclosures
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.
NFIB – The National Federation of Independent Business advocates for America’s small and independent business owners.
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.
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