Day Hagan Catastrophic Stop Update October 6, 2025
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The DH Catastrophic Stop model level is 50%, indicating that investors should maintain their benchmark equity exposure.
No change to our 30,000-foot view: Our models and indicators suggest an overall neutral outlook. Historically, equities have typically appreciated during periods of neutral market conditions. As a result, while we continue to anticipate a likelihood of short-term consolidation, we do not foresee a significant downturn on the near-term horizon.
Figure 1: The Day Hagan Catastrophic Stop model is neutral at 50%.
Sentiment levels moved lower, indicating some pessimism is starting to build. However, there is not yet enough indicator evidence to issue a sell (or underweight equities) signal. A drop below 30 and a reversal back above that level would be a bullish setup for a year-end rally.
Figure 2: The DH Daily Market Sentiment Composite is now 54.4%.
Equities remain more overbought than oversold. The Relative Strength Index (RSI) measures momentum by comparing recent gains and losses, indicating overbought conditions above 70 and oversold conditions below 30 on a 0–100 scale.
Figure 3: Back to short-term overbought levels.
Volume-weighted equity demand for the Russell 3000 continues to outweigh supply. A move below the 0% threshold would turn this indicator negative.
Figure 4: Volume-weighted Demand and Supply. The indicator weights trade volume by price direction to gauge whether supply (selling) or demand (buying) is dominating across Russell 3000 constituents.
The SPX is still supported by a positive gamma condition (muting volatility). A decline below 6,654 would create a “gamma flip,” whereby the market flips to a negative gamma condition (likely realizing greater volatility). Note: The Gamma Flip value changes throughout the day.
Figure 5: Positive gamma condition is currently in play.
Turning to the Government Shutdown
Our overall view is that investors largely dismiss shutdowns as a short-term issue, and the prevailing trend is expected to continue once shutdown-related volatility subsides.
Government shutdowns occur when Congress fails to agree on funding legislation, leading to partial federal closures. In the short term, they create disruptions across economic channels; however, the broader evidence suggests that their long-term impact on U.S. growth and markets is limited.
On economic growth, shutdowns temporarily depress GDP as federal workers are furloughed, and certain services are paused. These effects are usually recouped once back pay is issued and operations resume, keeping trend growth largely intact. Consumer spending is modestly affected, particularly in areas dependent on government workers or services, but aggregate demand rarely suffers lasting damage.
Employment indicators can reveal short-term distortions, with temporary job losses in federal payrolls and among contractors, but history shows that these fluctuations typically reverse quickly once government functions resume. Inflation is typically unaffected, as shutdowns do not materially alter demand conditions or supply capacity.
Internationally, shutdowns raise concerns about U.S. governance and fiscal management, but spillovers to global activity are minimal. The more pronounced effects are observed in bond markets, where yields can rise modestly in response to concerns about debt ceiling negotiations or fiscal credibility. However, U.S. Treasuries continue to serve as safe-haven assets during periods of uncertainty.
Taken together, 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.
Shutdown Statistics
Figure 6: History of Shutdowns 1.
Figure 7: History of Shutdowns 2. Source: Ashton Thomas Research, Congressional Research Services, Morningstar, E.D. Jones
Below are our views on the potential sector impacts from the shutdown
Figure 8: Likely Response to a Shutdown
Positioning
Data continues to show a mixed picture, depending on whether one is analyzing individuals, institutions, HFs, systematic/algo traders, etc. Suffice it to say that, overall, positioning is elevated, but net leverage values indicate potentially more room to the upside.
For example, GS shows that the U.S. Fundamental Long/Short Gross Leverage is at the 100th percentile on a three-year look-back. But net leverage is only at the 48th percentile.
3Fourteen Research shows that trend followers (based on the DBMF proxy below) have equity exposure at the high end of the 2.5-year range, while Volatility-targeting funds are also fully invested.
Again, somewhat of a mixed picture, but it’s pretty clear that the chase is on (we can see it in call volumes as well).
Figure 9: DBMF’s calculated exposure indicates that trend followers are reaching fully invested levels. A high equity exposure indicates the fund’s model expects stock prices to rise, so it has increased its long positions in equity index futures (like the S&P 500, NASDAQ, or other global indexes).
A 10% volatility target strategy adjusts equity exposure to maintain total portfolio volatility at approximately 10%. When markets are calm, it boosts equity exposure; when markets are volatile, it cuts equity exposure. Given current levels, these investment strategies are likely to dump stocks quickly in the event of a volatility spike. This is a concern.
Figure 10: A high 5-year z-score means the strategy’s current equity exposure is unusually elevated — signaling strong risk appetite or unusually subdued market volatility relative to history. In this case, our view is that it is both.
Earnings season begins on Thursday, October 9, with reports from Pepsi and Delta. Despite inflation and tariff concerns, analysts have raised S&P 500 Q3 EPS estimates over the past three months—up 0.1% to $67.41 from $67.32—marking the first increase heading into a new quarter since Q4 2021. Typically, estimates decline by 1–4% per quarter, making this quarter’s modest rise a notable shift in sentiment. (Source: FactSet)
Figure 11: The winners keep winning. FactSet writes, “ At the sector level, the Information Technology sector has the highest number of companies issuing positive EPS guidance of all 11 sectors at 36. This number is well above the 5-year average of 21.4 and above the 10-year average of 19.5 for the sector. In fact, this is the highest number of companies in the Information Technology sector issuing positive EPS guidance for a quarter since FactSet began tracking this metric in 2006. The previous record was 29, which occurred in the previous quarter (Q2 2025).”
Keep in mind that for calendar year 2026, investors are forecasting a 13.8% growth rate in earnings. This is very constructive until earnings revisions start to shift lower. As always, guidance will be key to Q4’s prospects. So far, for FY 2025 and 2026, earnings guidance has been net positive for Industrials, Health Care, Information Technology, Real Estate, and Financials. Communication Services is balanced, while the rest of the sectors have more negative guides than positive ones. But we’re still very early in the reporting process.
Figure 12: S&P 500 2026 earnings and revenue growth expectations. Please note that these expectations (or a significant portion of them) are already factored into the current price. It’s a pretty high hurdle.
Economic data were mixed last week, but our overall assessment remains unchanged: economic growth and inflation are constructive. How do we know? Equity prices (and the VIX) and bond yields (and MOVE). So far, the message of the markets is that recession odds are relatively low, and inflation pressures are modest.
Figure 13: The Citigroup Economic Surprise Index continues to show U.S. economic data beating expectations (on average over the past three months). It is interesting that during the 2020 recession, the CES Index showed economic releases beating estimates. Clearly, this was due to analysts taking their forecasts to basement levels and then becoming too optimistic following the end of the recession.
Upcoming Economic Releases
First, we’re keeping an eye on Japan’s election results, whereby the LDP party’s Sanae Takaichi won, positioning her to become Japan’s first female prime minister. Her victory signals continued fiscal stimulus and dovish monetary policy, boosting Japanese equities—especially exporters—on expectations of prolonged liquidity. Japanese government bonds may see yields stay low as the Bank of Japan maintains an accommodative stance. The yen could weaken further, supporting risk assets abroad but intensifying import costs. A softer yen also revives the carry trade, encouraging global investors to borrow in yen to fund higher-yielding assets, amplifying cross-market liquidity and risk appetite. These are the current market reactions, not guarantees of future policy outcomes. Stay tuned.
This week we’ll be focused on Tuesday’s Consumer Credit Report, Wednesday's 10-year Bond Auction, Thursday’s Unemployment Claims (tentative) and 30-year Bond Auction, and Friday’s Unemployment Report -- if the U.S Federal Government is open.
Like last week, there’s what I would call an “overabundance” of Fed speakers wishing to be heard. Keep in mind that in 2026, the FOMC’s voting lineup will change, likely bringing a more hawkish tilt, though outcomes aren’t guaranteed. Dallas Fed President Lorie Logan and others have cautioned against rapid rate cuts, while Governor Stephen Miran argues policy is overly restrictive. Neel Kashkari remains among the more dovish voices, setting up potential—but uncertain—tension within a reshaped Fed.
The new regional Fed presidents formally begin their one-year voting terms as part of the annual rotation on January 1, 2026. Their voting rights take effect at the first FOMC meeting of the year, scheduled for late January 2026, and remain in effect through all meetings that year.
Figure 14: Economic Calendar for the week
Study of the week:
The study of the week is courtesy of GS’s Carrett (via MarketEar). With the SPX up +14% YTD, he notes, “Only four other instances where the SPX is up this much at this point in the calendar (25y lookback). Past performance not indicative of future returns, but just proof things can get a bit 'silly’... average that return and you're talking SPX 7300+."
2024 was +20.3% (closed the year +24%).
2021 was +17.7% (closed the year +28.8%).
2019 was +17.1% (closed the year +28.7%).
2013 was +15.9% (closed the year +26.4%).
Figure 15: Another bullish historical perspective. Nonetheless, in our view, we need to get through earnings season first.
Conclusion: In summary, the overall outlook remains neutral but constructive. The Day Hagan Catastrophic Stop model at 50% supports maintaining benchmark equity exposure, while sentiment indicators show mild pessimism without a confirmed sell signal. Market internals—positive gamma, firm demand, and modest earnings momentum—continue to underpin stability. Although equities appear somewhat overbought and volatility-targeting strategies are fully invested, fundamental and technical data point to low recession risk and steady inflation trends. Sector positioning and earnings revisions suggest selective strength in Information Technology, Industrials, and Financials. Meanwhile, global dynamics—particularly Japan’s dovish policy stance and upcoming FOMC rotation—add nuance but not disruption. Overall, near-term consolidation remains likely, yet downside risk appears contained. Investors should maintain a balanced approach, keeping equity exposure while monitoring sentiment, volatility, and earnings guidance to confirm a potential year-end rally.
For more details on each sector and current model levels, please visit our research page at https://dayhagan.com/research.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, rational, and unemotional decisions about how much capital to place at risk and where to allocate 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 time that is convenient for you.
I hope you have a wonderful week,
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 and Fact Sheets 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 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.
CBOE Volatility Index (VIX) – Is a real-time index that represents the market’s expectations for the relative strength of near-term price changes fo the S&P 500 Index (SPX). Because it is derived from the prices of SPX index options with near-term expiration dates, it generates a 30-day forward projection of volatility. Volatility, or how fast prices change, is often seen as a way to gauge market sentiment, and in particular the degree of fear among market participants.
Gamma – Is an options risk metric that represents the sensitivity of an option’s delta to movements in the underlying asset, indicating how much delta will change when the underlying price shifts by one point. Therefore, gamma is a measure of how the rate of change of an option’s price will change with fluctuations in the underlying price. The higher the gamma, the more volatile the price of the option is.
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.
FOMC Meeting – The FOMC (Federal Open Market Committee) 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.
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