Day Hagan Catastrophic Stop Update November 26, 2024
The Catastrophic Stop model increased to 60.7% from 55.7% last week. The Internal Composite is bullish, and the External Composite is neutral.
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return Index.
The improvement was due to the High Yield and Emerging Market Breadth Factor shifting from neutral to bullish on 11-19-2023. Since then, the 10-year U.S. Treasury yield has declined from 4.39% to 4.29% this morning.
Figure 2: Improving bond breadth has historically been constructive for equities.
Option-adjusted spreads for U.S. Investment Grade, High Yield, MBS, and Agencies remain generally narrow, confirming the message from the High Yield and Emerging Market Breadth Factor.
Figure 3: OAS spreads narrowing is also constructive for equities.
We’re keeping an eye on the 26-week rate-of-change of the Moody’s Baa Bond Yield. The yield is down -1.2% from six months ago, placing this indicator in the neutral zone. However, a rise above 6% would likely indicate that headwinds are gathering again. Note that the benchmark being called is the Value Line Geometric Index, which has more of a SMID flavor. In our view, this is also a good indicator for small-cap stocks.
Figure 4: The interest rate backdrop continues to support equities, but we’re monitoring several indicators for signs that they have passed peak bullishness.
Figure 5: Based on measures of inflation, term premium, international rates, and economic activity, the 10-year Treasury yield fair value is 4.13% -- slightly below current levels.
Given the S&P 500’s Forward P/E of 22x (versus the 10-year average of 18.1x), we continue to focus on earnings as the driver for future gains rather than multiple expansion. FactSet notes that “The S&P 500 is reporting earnings growth of 5.8% for Q3 2024. However, for Q4 2024, the estimated earnings growth rate for the index is expected to more than double to 12.0%. If 12.0% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q4 2021 (31.4%).” If that earnings growth rate materializes, it will likely stave off a protracted decline.
Figure 6: Financials are expected to contribute the lion’s share of earnings growth in Q4 (+38.9%). The sector is currently rated overweight. The Energy sector remains under pressure and is currently rated neutral.
Figure 7: With 91.75% of S&P 500 companies reporting Q3 earnings, we note that the percentage of positive earnings surprises is 76.1%, down from the high-70s/low-80s for the previous six quarters. A decline below 70% would be concerning.
Figure 8: Several of our sector models include measures of earnings revisions. For example, the information technology sector's earnings revision breadth continues to support the sector. A reversal of the smoothed series (in the middle clip) below the top bracket would shift the indicator to a sell signal.
Lastly, we note the following bullish and bearish factors when reviewing the investment landscape. We use these lists to foster discussion around our models, indicators, and allocation.
Figure 9: Bullish Factors.
Figure 10: Bearish Factors.
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.
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.
SMID – Stands for small-and mid-cap, which refers t stocks with a market capitalization between $2 billion and $20 billion.
Value Line Geometric Index – is a stock index containing approximately 1,700 companies from the NYSE, American Stock Exchange, NASDAQ, Toronto, and over-the-counter-markets.
S&P 500 Information Technology – Comprised of those companies included in the S&P 500 that are classified as members of the GICS information technology sector.
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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