Day Hagan Catastrophic Stop Update November 19, 2024
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The Catastrophic Stop model declined to 55.7% from 67.9% last week. The Internal Composite is bullish, and the External Composite is low-neutral.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return Index.
The decline resulted from two breadth indicators shifting lower: 1) the MSCI ACWI (All-Country World Index) breadth factor turned negative, and 2) the High-Yield and Emerging Market bond breadth factor declined to a neutral reading. Both are shorter-term measures of market participation that evaluate the potential strength (and staying power) of recent moves. Given that both indicators are now slightly negative, we’ll focus on our intermediate-term measures to provide confirmation.
Figure 2: The ACWI breadth factor evaluates global equity participation
Figure 3: The High Yield and Emerging Market bond breadth factor provides a look into the fixed-income markets and how well they are functioning
Figure 4: Credit spreads have ticked higher as the equity market consolidates but remain near the lower end of their 5-year ranges.
Figure 5: Sentiment is still elevated, so we expect more backing and filling. However, our models do not yet suggest an outsized downturn is imminent. Nonetheless, we'll turn defensive if our models shift to negative readings.
Given the (unfathomable) escalation in the Russia/Ukraine war, we are providing the table below, which illustrates the DJIA’s subsequent performance following past crisis events. The bottom line is that unless there is a coincident decline in economic activity, a commodity spike, or a financial dislocation, the prevailing trend heading into the crisis event tended to remain intact six months after the event. Note that performance is calculated from the close of the trading day prior to the event date.
Figure 6: DJIA performance following crisis events.
Turning to our sector models, our two sector overweights at the beginning of the month were Consumer Discretionary and Financials. Both continue to hold up well, and we remain overweight. Below is our supporting commentary from the November Monthly Update (found on our website, DayHagan.com).
Consumer Discretionary: In October, stocks within the Consumer Discretionary sector experienced mixed outcomes amid economic pressures and shifting consumer habits. Key earnings highlights include Tesla’s (TSLA) stock surging by over 15% following robust third-quarter earnings and an optimistic sales growth forecast, significantly boosting the sector’s performance. McDonald’s Corp. (MCD) shares dropped approximately 5% amid concerns over an E. coli outbreak linked to its Quarter Pounder burgers, negatively impacting sector sentiment. eBay’s (EBAY) stock fell around 8% as the company projected lower-than-expected fourth-quarter revenue due to a challenging economic climate and cautious consumer spending. Tapestry’s (TPR) shares soared nearly 10% after a judge blocked its $8.5 billion acquisition of Capri Holdings. Overall, consumer spending was resilient. The composite model remained in positive territory with November’s update. Measures of trend, momentum, positive earnings surprises, and a reversal from short-term oversold conditions remained supportive during the month. We remain overweight.
Figure 7: Though there are signs that lower-income consumers are struggling, the overall message from the Consumer Credit Conditions Index is that the availability of money is bullish.
Financials: The Financials sector was the second-best performer in October. Key players in the sector contributed significantly to this performance, with JPMorgan Chase & Co. (JPM) reporting a net income of $12.9 billion, a 2% decrease compared to last year but above analysts’ expectations, leading to a 4.4% rise in its stock price, bolstered by strong consumer banking revenues. Similarly, Wells Fargo & Co. (WFC) saw a net income decline of 11% to $5.1 billion, yet this also exceeded forecasts, resulting in a 5.6% stock increase due to higher net interest income. Bank of America Corp. (BAC) displayed a 9% increase in net income to $7.8 billion, thanks to rising interest rates. However, Goldman Sachs Group, Inc. (GS) faced a downturn in investment banking revenue, although growth in its wealth management division mitigated some losses. The positive interest rate environment, steady GDP growth, and low unemployment rates bolstered consumer confidence, promoting increased borrowing and financial activity. Overall, U.S. financial stocks exhibited strength, fueled by better-than-expected earnings and favorable economic conditions. The composite model improved due to lower relative volatility, the Citi Economic Surprise Index turning positive (meaning investors are potentially underestimating current levels of economic activity), and credit spreads (OAS) for financial companies narrowing. We increased exposure.
Figure 8: The G10 Economic Surprise Index has turned positive, indicating that investors are potentially underestimating the current levels of economic activity.
Figure 9: While U.S. economic reports have been coming in better than expected, the St. Louis Financial Stress Index indicates “Low Financial Stress.” This, too, has typically been bullish for equities and economic activity.
We note from the “potentially of interest” file that the small-cap vs. large-cap ratio is back to its 200-day moving average. While we have some SMID exposure in the portfolio, it is below 5%. (The back-up in interest rates disproportionately affects lower-tier companies.)
Figure 10: Small caps have yet to break out decisively. Our models are neutral.
Figure 11: A little more work still needs to be done before the short-term overbought conditions are worked off.
Bottom Line: Our longer-term models remain supportive, but there has been some deterioration. At this point, our models' collective message is that the uptrend is intact.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. As has been the case for all of 2024, the broader-based composite models calling U.S. economic growth, international economic growth, inflation trends, liquidity, and equity demand remain constructive. The Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will 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
Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. Charts courtesy Ned Davis Research (NDR). © Copyright 2024 NDR, Inc. Further distribution is prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
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.
MSCI All Country World Index (ACWI) – is a stock index designed to track broad global equity-market performance. The Index comprises the stocks of nearly 3,000 companies from 23 developed countries and 24 emerging markets.
Option Adjusted Spread (OAS) - The measurement of the spread of a fixed-income security rate and the risk-free rate of return (the theoretical rate of return of an investment with zero risk), which is then adjusted to take into account an embedded option.
Citi G10 Economic Surprise Index – Tracks whether a core set of economic data series has been coming in under expectations, at expectations, or over expectations.
Russell 2000 Index – An index comprised of the 2,000 smallest companies on the Russell 3000 list and offers investors access to small-cap companies. It is a widely recognized indicator of small capitalization company performance.
Breadth Thrust – A technical indicator which determines market momentum, signaling the start of a potential new bull market.
Credit spread – The difference between two debt securities with different credit ratings but similar maturities. It is a common way to measure how much of a premium an investor might receive for taking on more risk.
Real Gross Domestic Product (GDP) – Is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year. Real GDP is expressed in base-year prices.
Small Cap stock – Is a publicly traded company with a market capitalization – the value of its common shares calculated by multiplying the number of shares by the current stock price – of between $300 million and $2 billion.
SMID – Stands for small-and mid-cap, which refers t stocks with a market capitalization between $2 billion and $20 billion.
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.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
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