Day Hagan Catastrophic Stop Update November 3, 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.
Several factors continue to underpin a constructive equity outlook. Q3 earnings have broadly exceeded expectations, pushing S&P 500 growth to ~10.7% y/y, with guidance holding up. Notably, earnings expectations for the “493” are poised to narrow the gap with the “7” over the coming quarters.
Mega-cap tech remains a powerful tailwind, signaling sustained AI-driven capex through 2026 and supporting demand across semiconductors, cloud, and networking. Inflation has eased only gradually (Sept CPI +0.3% m/m, +3.0% y/y), yet markets increasingly view the Fed as less restrictive as balance-sheet runoff slows—even as Powell downplayed near-term cuts. We still see December as in play.
Market leadership remains uneven. Breadth weakened last week despite new highs in late October, though longer-term trend signals remain intact. Sentiment has improved modestly, reducing the contrarian advantage, yet signs of lingering pessimism persist. Recent equity inflows and still-moderate hedge-fund beta imply room to add risk, while Goldman notes recent strength has been driven more by short-covering than fresh long buying.
Technical conditions could improve as the buyback blackout ends, reopening a steady source of demand and supporting year-end rally potential. Risks include the federal shutdown—estimated to shave $7–$14B from GDP—and soft but stabilizing manufacturing (ISM 49.1; S&P Global US Manufacturing PMI 52.2).
Resilient earnings, sustained AI investment, a less-restrictive policy backdrop, and renewed buybacks should outweigh near-term headwinds. Positioning and flows remain supportive, but a cluster of upcoming data releases could introduce episodic volatility.
Figure 1: The Catastrophic Stop model would generate a sell signal by closing below 40% for two consecutive days. The current message is neutral.
The Day Hagan Daily Market Sentiment Composite remains in the “Excessive Pessimism” zone, reflecting a notable rise in investor caution. We wrote last week that, “Historically, such rapid buildups in pessimism have often preceded rebounds, suggesting a greater likelihood of a year-end rally.” So far, so good.
As of last Friday, U.S. equity sentiment remained cautious despite new market highs. The weekly American Association of Individual Investors (AAII) Bull-Bear spread stood around 7.17, up from -5.80% the previous week, indicating more bulls than bears, but not yet extended. Fund flows showed only $1.81 billion into U.S. equities for the week ending Oct 29, pulling back sharply from ~$9.65 billion the prior week, but understandable as investors awaited the FOMC decision and presser.
Meanwhile, we’re keeping an eye on technical breadth (e.g., the percentage of S&P 500 stocks above their 50—and 200-day averages), as both measures declined into last Friday, now 22% and 33%, respectively. (Last Monday was odd, with the worst day of market breadth ever; the market closed at an all-time high, but 80% of the stocks declined. Some divergences reversed later in the week, but this is worth remembering.)
Figure 2: The Day Hagan Daily Market Sentiment Composite remains in excessive pessimism territory. A reversal back above 30% would generate a fresh buy signal.
Overall, systematic and algo-related leverage appears mid-range, and positioning is not overly crowded. If macro data cooperate, this could continue to support a year-end rally.
Figure 3: Positioning indicators and composites are neutral. The 10% Volatility Targeting equity allocation chart below implies that much of the froth has already been worked off.
Credit spreads remain relatively tight, but they significantly widened on Friday because markets repriced the Fed's path to “less easing,” pushing Treasury yields up and risk premia wider.
After Chair Powell said a December cut is “not a foregone conclusion,” high-yield sold off and risk premia jumped; Bloomberg flagged the biggest one-day HY spread widening in ~3 weeks.
Treasury yields rose into the close as traders pared December cut odds, mechanically pressuring corporate spreads.
Hawkish follow-ups (e.g., Dallas Fed’s Logan opposing another cut) reinforced the shift.
Figure 4: Net: higher rates + hawkish Fed messaging = wider credit spreads. However, a longer-term perspective shows spreads still tight relative to history.
Seasonality remains a tailwind.
Figure 5: 2025 Cycle Composite
As written last week, “Of course, there are several important risks to keep in view. Rising tariff tensions, particularly China’s potential export controls on rare earth minerals, could pose significant supply-chain and cost pressures. Geopolitical risks remain elevated, with multiple conflicts and political uncertainties creating a fragile backdrop. Retail investors’ heavy exposure to call options also increases volatility risk if sentiment shifts abruptly. Meanwhile, liquidity concerns have resurfaced, as stress indicators such as SOFR spreads signal tightening market conditions. Equity valuations remain demanding, and the recent rise in oil prices could re-ignite inflation concerns or squeeze profit margins.
As we move toward 2026, delayed profit-taking is possible. Historically, January has been the third-worst month for equities based on the percentage of positive returns since 2010, suggesting some seasonal vulnerability as investors rebalance portfolios and lock in gains.” These factors remain in play.
Figure 6: Since 2010, January has been positive 56.25% of the time.
From an overbought/oversold perspective, based on the 21-day RSI, the SPY isn’t at max overbought levels but is close. This represents some potential near-term risk.
Figure 7: The SPY with a 21-day RSI.
The SPX's gamma condition is positive, which supports muted volatility. SPX 6,653 represents the current gamma flip point (which changes daily), at which point gamma would move into a negative state.
Figure 8: SPX is in a positive gamma state. (Source: Barchart.)
The expected move for the SPX, based on 85% of the value of the at-the-money straddle, shows a range of SPX 6,670 to 7,010 heading into the 11-21-2025 expiration.
Figure 9: Expected move based on options pricing. Source: Barchart.
Since data is sparse given the shutdown, we thought a quick look at some of Powell’s comments from Wednesday would help fill the gap:
TLDR: Economic activity is OK, inflation likely to be OK, but still marginally too high for the FOMC’s liking.
Powell: “We are not seeing an uptick in jobless claims or a downtick, really, in job openings.” (DH: Job market balanced.)
“Once again, I would just point out that we have the situation where the risks are to the upside for inflation and to the downside for employment. We have one tool, it can't do both of those, you can't address both of those at once.” (DH: The FOMC will focus on employment first, which is good for the economic outlook.)
“Available indicators suggest that economic activity has been expanding at a moderate pace. GDP rose at a 1.6 percent pace in the first half of the year, down from 2.4 percent last year. Data available prior to the shutdown show that growth in economic activity may be on a somewhat firmer trajectory than expected, primarily reflecting stronger consumer spending.” (DH: Economic activity OK.)
“Business investment in equipment and intangibles has continued to expand, while activity in the housing sector remains weak. The shutdown of the federal government will weigh on economic activity while it persists, but these effects should reverse after the shutdown ends.” (DH: Shutdown is considered a mild disruption but not a trend-changer.)
“Inflation has eased significantly from its highs in mid-2022 but remains somewhat elevated relative to our 2 percent longer-run goal. Estimates based on the Consumer Price Index suggest that total PCE prices rose 2.8 percent over the 12 months ending in September and that, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent as well.” (DH: Inflation marginally too high, but not overly concerning for the Fed.)
“These readings are higher than earlier in the year as inflation for goods has picked up. In contrast, disinflation appears to be continuing for services. Near-term measures of inflation expectations have moved up, on balance, over the course of this year on news about tariffs, as reflected in both market- and survey-based measures. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal.” (DH: Powell would appreciate it if we didn’t worry too much about inflation.)
At the meeting, the Fed announced the end of QT (for now). We think they overplayed it, and now there are some liquidity issues. We’ve seen this before; it hasn’t been overly detrimental to market structure and function. We like that the Fed also sees it and is trying to get ahead of it.
Important point: The Fed announced that they “will continue to allow agency securities to run off our balance sheet and will reinvest the proceeds from those securities in Treasury bills, furthering progress toward a portfolio consisting primarily of Treasury securities.” (DH: Keep an eye on the relative strength of mortgage-backed securities.)
Figure 10: Rate cut expectations have been dampened, but not quashed. Investors are still pricing in rate cuts through 2026. (Source: StreetStats.)
Figure 11: U.S. economic activity is constructive for equities. The Atlanta Fed’s GDPNow model estimates Q3 GDP to be 3.9% (as of 10/27). 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.”
Figure 12: U.S. Economic Surprise Index. (Source: Yardeni)
Turning to earnings, the news has been good. Earnings and revenue beats are well ahead of the 5- and 10-year averages. For Q4, y/y earnings growth forecast = 7.6%. For calendar year 2026, 14.0%. As long as earnings hold up, we do not foresee a “big bear market.”
Figure 13: Earnings revisions continue to trend positively.
DCF (discounted cash flow) valuation discounts projected cash flows to present value using a risk-free rate plus an equity risk premium. The table below estimates S&P 500 fair value with a two-stage DCF: five years of growth, then stable growth. The 5-Year Treasury sets the risk-free rate for early cash flows; years 6–10 use the 5-Year Forward 5-Year yield. Longer Treasuries are avoided due to liquidity and risk premiums. Real growth drives the model; nominal growth uses Cleveland Fed inflation expectations.
As you can see, should the Fed lower rates by 50 bps (with it flowing through into the 5-year yield) and achieve 5% better earnings growth, the SPX valuation model would project a 7,222 fair value price. Conversely, an increase of 50 bps and a 5% decline in earnings would project a 6,340 fair value.
Figure 14: The heatmap below provides an interesting backdrop for a fundamental scenario analysis.
Upcoming Economic Releases:
Lots of Fed governors speaking. I guess they’ll have to do in place of actual data.
Still a toss-up about whether Federally provided economic releases will be distributed.
Updated Manufacturing PMI data on Monday.
ADP non-farm employment and services PMIs are on Wednesday.
Figure 15: Economic Calendar for the Week
Bottom Line: The Day Hagan Catastrophic Stop model closed at 50% on Friday, signaling investors should maintain their benchmark equity exposure. Several supports remain for a constructive equity stance: Q3 earnings are up ~10.7% y/y, with future guidance holding up and broadening across the index. Mega-cap tech is ramping AI capex into 2026, sustaining demand across chips, cloud & networking. Inflation is easing modestly (Sept CPI +0.3% m/m, +3.0% y/y), and the Federal Reserve’s balance-sheet runoff is slowing, implying less restrictive policy. However, leadership is still volatile, and market breadth remains weak (22% / 33% above 50- / 200-day averages). Sentiment has improved modestly, flows are supportive, and positioning remains mid-range—implying upside asymmetry if macro data cooperate. Offset risks include the federal shutdown, soft manufacturing, seasonal January vulnerability, and rich valuations.
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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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