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Summary
Our indicators support maintaining benchmark equity exposure while remaining selective. Strong earnings and firmer employment underpin growth, but inflation and potential Fed tightening constrain valuations. Sector leadership is shifting toward Health Care, Consumer Staples, Financials, and Materials, while Technology and Energy face weaker participation. Post-election concerns about AI investment contributed to volatility, although pessimistic sentiment and lighter positioning could support a recovery. Earnings upgrades remain uneven, making cash generation increasingly important. In fixed income, attractive yields favor quality and controlled maturities, while weaker borrowers face greater scrutiny. We are watching inflation, earnings revisions, and buying pressure for confirmation that improving participation can sustain broader market gains.
The Catastrophic Stop Model stands at 45.45%, supporting benchmark equity exposure but signaling limited cushion. A reading below 40% for two consecutive days would trigger raising cash. Current conditions warrant close monitoring and disciplined positioning.
Figure 1: The model remains constructive, although its margin of safety is still narrow. A reading below 40% for two consecutive days would trigger a sell signal and call for reduced equity exposure or higher cash levels.
Note: Hypothetical and historical past performance is not indicative of future results. There can be no assurance that any investment or strategy will achieve its objectives or avoid substantial losses or have comparable results. This information is provided for illustrative purposes only and is not a prediction, projection or guarantee of future performance. Hypothetical results do not reflect actual trading, were derived using the benefit of hindsight, and may not reflect material economic and market events. Actual results vary and depend on many factors and subject to risk and uncertainties.
Buying pressure has steadily weakened, with Russell 3000 volume demand now roughly equal to supply. The initial post-election rally broadened participation, but that improvement faded. By Friday, approximately 318 S&P 500 stocks declined versus 184 advancing, despite the index’s gain. This suggests headline returns overstated underlying strength. The near-zero reading signals fading support, rather than overwhelming selling. A sustained recovery in buying pressure and broader participation would provide stronger confirmation that the market is regaining its footing.
Figure 2: Equity breadth statistics are mixed, oscillating around the 0% threshold.
The sentiment composite has fallen to 18.37, below its 30 threshold, indicating excessive pessimism and potential contrarian support for stocks. Initial post-election enthusiasm quickly gave way to concerns about AI spending and regulation. The VIX finished the week near 25.6, up approximately 32%, confirming heightened uncertainty. Such fear can create opportunities, but sentiment alone cannot establish a market bottom. Improving price trends and buying pressure would strengthen the case that pessimism is becoming a durable buying opportunity.
Figure 3: Sentiment remains pessimistic. This is constructive from a contrarian perspective.
About 46.4% of Russell 3000 stocks are above their 50-day averages, recovering above the model’s 45% threshold, although a majority remain below trend. Post-election optimism gave way to renewed anxiety, yet participation has improved from its recent low. Note: This differs from volume demand and supply because breadth counts stocks above a price threshold, while the earlier indicator measures buying versus selling pressure through volume. More stocks can regain their averages without a decisive improvement in aggregate buying pressure.
Figure 4: Breadth improving into other sectors outside of tech.
High-yield bond breadth has recovered to 4.67, above zero and comfortably above its −10 warning threshold, suggesting improving participation and easing credit-market stress. Around the election, Treasury yields fluctuated before finishing lower, with the 10-year declining from 4.94% to 4.86%. The MOVE index ended near 92.8, below October’s peak, indicating moderating interest-rate uncertainty. Together, these readings suggest fixed income held up better than equities, although stronger breadth does not eliminate default risk or sensitivity to inflation.
Figure 5: High-yield breadth improving as yields retreat.
Credit spreads remain below their historical averages, suggesting contained overall credit stress. Investment-grade spreads stand at 0.91% and high-yield spreads at 3.36%. Around the election, junk bonds initially rallied before Thursday’s AI-related selloff widened spreads again. Beneath the averages, risk is less comfortable: CCC-rated spreads reached approximately 13.2% on November 5. That divergence indicates investors are demanding substantially greater compensation from weaker borrowers, reinforcing the importance of issuer selection even when broad credit conditions appear relatively stable.
Figure 6: U.S. Credit spreads (OAS) still relatively tight.
The 4.50 score signals a mixed backdrop: strong earnings and firmer hiring offset inflation, fiscal pressures, and uneven participation. October payrolls increased 165,000 and unemployment eased to 4.1%, supporting corporate credit but reinforcing the possibility of further Fed tightening. Treasury yields rose after Friday’s report, despite declining over the week. For fixed income, this favors selective exposure to short- and intermediate-term quality bonds. High yield benefits from continued growth, while longer-duration bonds remain vulnerable to inflation and rising rates.
Figure 7: The Scorecard’s message is stay invested while containing excess risk.
Portfolio Outlook
The scorecard shows uneven sector strength: Health Care and Real Estate have firmer momentum, while Technology is oversold and below both moving averages. October’s 165,000 payroll gain and 4.1% unemployment support consumer spending and credit quality, potentially benefiting Consumer Discretionary and Financials. However, stronger hiring reinforces the risk of further Fed tightening, challenging rate-sensitive Real Estate, Utilities, and expensive growth stocks. Strong aggregate earnings remain supportive, but sector trends favor selectivity over assuming a broad market recovery.
Figure 8: S&P 500 Sector Fundamentals and Technicals. Technical shading: green = strong; yellow = neutral/mixed; red = weak. ChartExchange daily closes and FactSet. YTD exclude distributions. MA = simple average. RSI uses Wilder smoothing.
Sector Weekly Update:
For the week ended Friday, November 6, 2026, the S&P 500 declined 2.68%, the Nasdaq Composite fell 3.37%, and the Dow lost 0.94%. Five of the eleven sector ETFs advanced, led by Communication Services, Real Estate, and Consumer Discretionary. Energy and Information Technology suffered substantial declines. We view this divergence as evidence that investors are reassessing earnings expectations and spending commitments, with meaningful differences emerging among companies exposed to the same investment themes.
The election produced a strong initial rally, followed by a sharp reversal. After Democrats won control of both chambers of Congress, the S&P 500 rose 1.6% on Wednesday, with homebuilders, retailers, and health care companies among the beneficiaries. However, concerns about potential restrictions on data-center development weighed on businesses supplying the AI buildout. Thursday’s selloff overwhelmed the broader market’s initial gains. These moves reflected changing expectations about policy and profitability, rather than changes already enacted into law.
Third-quarter earnings remain supportive, although the magnitude of earnings surprises continues to lag historical averages. FactSet’s November 6 update showed blended S&P 500 earnings growth of 31.4%, with 88% of companies reporting. While 84% exceeded earnings estimates, aggregate earnings were only 2.7% above expectations, compared with a five-year average of 7.5%. All eleven sectors reported earnings growth, with Energy, Information Technology, and Materials leading. Our focus remains on whether companies can translate growth into sustainable margins and cash available after investment spending.
Consumer Discretionary gained 1.91% for the week. Retailers and homebuilders contributed to Wednesday’s post-election rally as investors considered the potential for policies addressing affordability. Amazon also benefited from the view that a more measured data-center expansion could reduce spending pressure and increase the value of existing capacity.
Consumer Staples gained 0.74%. The sector held up better than the broader market. Lower oil prices could eventually help transportation and packaging costs, although the benefits depend on purchasing contracts and competitive pricing. We continue to favor companies that can increase sales volumes while protecting margins. Improving affordability would be helpful, but consumers still need sufficient income growth to support purchases without relying more heavily on credit.
Communication Services gained 4.89%, leading the sectors. The reversal from the prior week’s weakness was notable. Alphabet and Meta participated in Wednesday’s rally as investors reconsidered the implications of potentially slower infrastructure spending. Less aggressive construction could support cash flow, but insufficient capacity could also limit growth. We remain focused on advertising demand, AI monetization, and the returns companies earn on their expanding asset bases.
Energy declined 12.00%, the weakest sector. The sharp decline in oil prices overshadowed strong recent operating results. ConocoPhillips reported $4.0 billion in quarterly earnings, generated $7.2 billion in operating cash flow, and increased its quarterly dividend by 11%. Those results demonstrate substantial cash generation, but they also illustrate why trailing earnings alone are insufficient. Our emphasis remains on balance-sheet strength and the ability to fund investment and shareholder distributions at lower commodity prices.
Financials gained 1.15%. The positive weekly return contrasted with the broader market’s decline, but it does not establish that every financial business benefits from the election outcome. Banks, insurers, asset managers, and payment companies face different earnings drivers. We continue to monitor loan demand, credit losses, funding costs, and fee income. Regulatory expectations matter, but sustained improvement ultimately requires sound underwriting and profitable business activity.
Health Care declined 0.04%, essentially unchanged. Hospitals benefited from post-election expectations surrounding Medicaid and Affordable Care Act funding, although those expectations remain subject to legislative decisions. Separately, FactSet identified Health Care as one of the largest contributors to the week’s improvement in aggregate earnings growth. We continue to look for identifiable product demand and improving profitability while recognizing that reimbursement policy can affect companies differently.
Industrials declined 2.83%. The sector’s weakness contrasted with encouraging results from some individual businesses. Uber reported 20% growth in gross bookings, 30% growth in GAAP operating income, and approximately $2.5 billion in free cash flow. Those results provide evidence of continued activity and improving operating performance.
Information Technology declined 8.23%. Concerns about the pace of future AI infrastructure spending weighed heavily despite strong current demand. AMD reported 45% revenue growth, with data-center revenue increasing 97% to $8.5 billion. The contrast between operating results and share-price performance is important. Strong growth can coexist with falling valuations when investors reassess future spending, customer concentration, or how much optimism is already reflected in prices.
Materials declined 1.50%. FactSet continued to identify Materials among the sectors leading third-quarter earnings growth, but that strength did not prevent a weekly decline. Lower energy costs could help some producers, while changes in construction and infrastructure spending could affect demand. We are looking for improving shipment volumes, pricing discipline, and operating efficiency.
Real Estate gained 1.92%, ranking second. Treasury yields finished below the prior week’s levels, providing a more favorable financing backdrop. However, modestly lower yields do not eliminate refinancing risk or weak property demand. We favor manageable debt maturities, reliable tenants, and improving cash flow. Data-center properties also warrant separate analysis because existing facilities and proposed developments may respond differently to changes in permitting and construction.
Utilities declined 0.69%. The election highlighted an important distinction between projected electricity demand and projects that ultimately receive approval and earn acceptable returns. Companies supplying power to data centers faced uncertainty about the pace of development. We continue to emphasize firm customer commitments, realistic construction schedules, and regulatory approval to recover costs.
Note. Index figures are weekly price returns. Sector figures exclude distributions and may differ from dividend-adjusted ETF returns or corresponding S&P 500 sector index returns.
Figure 9: Sector Relative Strength vs. S&P 500.
Participation favors Health Care and Consumer Staples, with most stocks above both moving averages. Financials and Materials also show broad support. Technology, Energy, and Communication Services remain weak, including no Energy stocks above their 50-day averages. Utilities and Real Estate show stronger short-term participation, but their longer-term trends still need further repair.
Figure 10: Breadth improvement happening in previously ignored sectors.
Our proxy for volatility-targeting funds’ equity allocation has dropped sharply to roughly 0.8 standard deviations below its five-year average, indicating reduced exposure as volatility increased. Such strategies can amplify declines by selling into weakness. Positioning is now lighter, potentially reducing further selling pressure and creating scope for renewed buying if volatility subsides, although exposure remains above historical extremes.
Figure 11: Vol-targeting funds’ exposure declined, closing in on -1 SD. This is relatively constructive, in our view.
DBMF’s S&P 500 exposure remains positive at 26.45%, but has declined from recent levels above 40%, indicating reduced bullish positioning. Unlike the previous chart’s volatility-based allocation, this tracks one fund’s exposure. It suggests some selling has already occurred, although further reductions remain possible. Positive exposure indicates continued participation rather than an outright bearish stance.
Figure 12: Positioning indicators are now indicating potential slight underexposure to equities.
Forward earnings estimates remain supportive but increasingly uneven. Over 63 trading days, S&P 500 estimates rose 6.8%, with strong upgrades in Technology, Energy, and Health Care, while Communication Services and both consumer sectors saw cuts. These are estimate changes, not earnings growth rates. FactSet reports 31.4% third-quarter earnings growth, but aggregate results beat forecasts by only 2.7%. Election-related concerns about AI construction threaten future expectations, rather than establish collapsing profits. The key is whether strong reported earnings translate into sustained upgrades and cash flow.
Figure 13: Earnings continue to support equities, but weakening momentum is being monitored closely.
Seasonal patterns suggest tailwinds for the remainder of the year. The cycle composite remains relevant because historical patterns suggest a stronger period after the midterms and into next year. However, it has poorly matched this year’s path: stocks experienced larger swings and remain ahead of the composite. We treat it as a seasonal guide, requiring confirmation from earnings, breadth, and market trends.
Figure 14: Updated S&P 500 cycle composite for 2026 and 2027.
The 4.25 score favors collecting income while controlling credit and interest-rate risk. October’s 165,000 payroll gain supports borrowers’ earnings but reduces urgency for Fed cuts, leaving longer-maturity bonds sensitive to inflation. Lower Treasury yields over the week suggest demand for safety, although Friday’s jobs report triggered selling. High-yield spreads widened through Thursday, indicating weaker appetite for credit risk. Short- and intermediate-term Treasuries and quality corporates offer income, while weaker junk issuers warrant greater selectivity.
Figure 15: The scorecard supports selective bond exposure, emphasizing high credit quality and manageable interest-rate risk.
Rates remain elevated compared with much of the past two decades, despite the recent pullback. The chart shows longer-term Treasury yields above short-term yields and mortgage rates above 7%, keeping borrowing expensive. Higher yields improve starting income for bond investors, but financing costs continue to weigh on housing, refinancing, and business investment.
Figure 16: Rates have pulled back slightly. Mortgage rates still relatively high.
Fed rate hike odds supports caution rather than optimism that tightening is nearly finished. It implies an 83% probability of a December hike and roughly 91% probability that rates reach 4.25%–4.50% by July—two quarter-point increases above today’s range. These are market expectations, not Fed commitments. Stocks can advance alongside higher rates if earnings deliver, but expensive growth companies and heavily indebted businesses remain vulnerable. A more encouraging combination would be easing inflation, sustained earnings upgrades, and broader market participation.
Figure 17: Rate hike expectations increased after solid employment data last week.
U.S. Economic Releases:
Last week’s releases suggest continued expansion, with manufacturing and services growing and hiring exceeding expectations. Lower unemployment and stronger wages support spending, although construction weakened. Inflation signals were mixed: manufacturing price pressures remained elevated, but inflation expectations eased. For corporate America, stronger productivity and lower unit labor costs offer potential margin support.
This week, inflation is the priority: watch CPI and PPI for evidence that price pressures are easing enough to temper rate-hike expectations. Treasury auctions will test demand for government debt. Jobless claims, small-business confidence, and housing data will help assess whether growth remains firm despite high borrowing costs. Cooler inflation alongside stable activity would be the more supportive combination for stocks and bonds.
Figure 18: Economic release calendar. Source: Forexfactory.com
Showing this for one more week: Midterm years have historically been uneven for stocks. From 1931 through 2025, the S&P 500 averaged a 4.7% calendar-year price gain in midterm years, versus 9.6% in other years. The average midterm path was weakest around September. The picture improved after voting: the chart shows an average 14.8% price gain in the 12 months following Election Day since 1950. These are historical averages, not a forecast. Economic conditions, earnings, and interest rates still shape each cycle.
Figure 19: Whether a midterm year or not, equities have tended to find a bottom during the September/October period.
Democratic victories could support hospitals, renewable energy, and affordability-focused retailers and homebuilders, while increasing scrutiny of banks, fossil fuels, and AI infrastructure. We have seen some repricing already: hospitals and housing-related stocks rallied after the election, while energy and data-center suppliers faced pressure. Established technology platforms could benefit if slower construction restrains spending. However, congressional control does not guarantee legislation, presidential veto power remains, and earnings, oil prices, and interest rates also influenced last week’s sector moves.
Figure 20: Last week we posited: “History shows that following elections, markets tend to do well. Is this time different? It looks to us like investors are already positioning for potential disruptions, which can be positive.” This seems to be playing out as discussed.
Source: Reuters.
Bottom Line
Our indicators support maintaining benchmark equity exposure while remaining selective. Strong earnings and firmer employment underpin growth, but inflation and potential Fed tightening constrain valuations. Sector leadership is shifting toward Health Care, Consumer Staples, Financials, and Materials, while Technology and Energy face weaker participation. Post-election concerns about AI investment contributed to volatility, although pessimistic sentiment and lighter positioning could support a recovery. Earnings upgrades remain uneven, making cash generation increasingly important. In fixed income, attractive yields favor quality and controlled maturities, while weaker borrowers face greater scrutiny. We are watching inflation, earnings revisions, and buying pressure for confirmation that improving participation can sustain broader market gains.
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.
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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 model histories; they should be considered hypothetical. All Rights Reserved. © Copyright 2026 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
Disclosure: The information contained herein is provided for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. The securities, instruments, or strategies described may not be suitable for all investors, and their value and income may fluctuate. Past performance is not indicative of future results, and there is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. Investing involves risks, including loss of principal.
This material is intended to provide general market commentary and should not be relied upon as individualized investment advice. Investors should consult with their financial professional before making any investment decisions based on this information.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, and bonds are subject to availability and changes in price. Bond yields are subject to change. Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest, and credit risk.
References to markets, asset classes, and sectors, are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested in directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges.
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Definitions
S&P 500 Index—An unmanaged composite of 500 large-cap companies, 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.
Russell 3000: The Russell 3000 Index measures the performance of approximately 3,000 of the largest U.S. publicly traded companies, representing about 98% of the investable U.S. equity market.
AAII Sentiment Survey — A weekly survey measuring whether individual investors expect stocks to rise, fall, or remain unchanged over the next six months.
Backwardation — A futures-market structure in which near-term commodity prices exceed longer-dated prices, often indicating tight current supplies.
Benchmark Equity Allocation — The normal percentage of a portfolio assigned to stocks based on its investment objective and risk profile.
Breadth — The degree to which market gains or losses are shared across individual stocks. Broad participation generally strengthens a market trend.
Bull-Bear Spread — The percentage of bullish investors minus the percentage of bearish investors.
Catastrophic Stop Model — Day Hagan’s risk-management model designed to identify periods when major market deterioration may warrant reducing equity exposure.
CDS, or Credit Default Swap — A market-based measure of the perceived risk that a borrower will default. Rising CDS costs generally indicate increasing credit concern.
Contrarian Buy Signal — A signal suggesting widespread pessimism may have become excessive, potentially creating a buying opportunity.
Contrarian Sell Signal — A warning that optimism, risk-taking, or positioning may have become excessive, increasing vulnerability to disappointment.
Daily Market Sentiment Composite — Day Hagan’s 0–100 measure combining multiple indicators of investor psychology. Readings below 30 indicate excessive pessimism, while readings above 70 indicate excessive optimism.
DBMF — The iMGP DBi Managed Futures Strategy ETF, used here as a proxy for positioning among systematic, trend-following strategies.
Drawdown — The percentage decline from an investment’s previous peak to its subsequent low.
Earnings Revisions — Changes analysts make to company profit estimates. Rising estimates are generally supportive of stock prices.
Federal Funds Rate — The Federal Reserve’s primary short-term policy interest rate.
FOMC — The Federal Open Market Committee, the Federal Reserve group responsible for setting monetary policy and interest rates.
Forward Earnings — Analysts’ estimates of company profits over a future period, commonly the next 12 months.
Forward Earnings Growth Rate — The expected percentage increase in future corporate earnings compared with the prior comparable period.
Forward P/E Ratio — A stock’s price divided by expected earnings over the next 12 months. Higher readings generally indicate more demanding valuations.
Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
Maximum Drawdown — The largest peak-to-trough decline experienced during a specified period.
OAS, or Option-Adjusted Spread — The additional yield a bond provides over a comparable Treasury after adjusting for embedded options. Wider spreads generally indicate greater perceived credit risk.
Overbought — A condition in which prices have risen rapidly and may be vulnerable to a pause or pullback.
Oversold — A condition in which prices have fallen rapidly and may be positioned for a rebound.
PEG Ratio — The price-to-earnings ratio divided by expected long-term earnings growth. A lower ratio may indicate a more attractive valuation relative to anticipated growth.
Risk-Off Signal — An indication that market conditions have deteriorated enough to favor reducing exposure to riskier assets.
RSI, or Relative Strength Index — A momentum indicator ranging from 0 to 100. Readings above 70 commonly indicate overbought conditions, while readings below 30 indicate oversold conditions.
Systematic Investors — Strategies that adjust exposure using predefined rules based on trends, volatility, momentum, or other quantitative signals.
VIX — A market-based measure of expected S&P 500 volatility over the next 30 days, sometimes called the market’s fear gauge.
Volatility-Targeting Strategy — A rules-based strategy that generally reduces equity exposure when volatility rises and increases exposure when volatility falls.
WTI — West Texas Intermediate, a major U.S. crude-oil pricing benchmark.
WTI Forward Curve — The series of prices for WTI crude-oil futures across different expiration dates, reflecting supply, demand, storage, and market expectations.
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