Day Hagan Catastrophic Stop Update October 15, 2024
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Summary
The Catastrophic Stop model declined to 72.9% from 82.9% last week. The Internal and External Composites are bullish.
Figure 1: The Catastrophic Stop model declined as the market made new highs. This aligns with expectations, as the model is designed to appraise risk, and risks naturally increase as the market rises.
The model’s decline was primarily due to the Daily Trading Sentiment Composite moving into the Excessive Optimism zone.
Figure 2: Near-term sentiment measures are now rated excessively optimistic. This condition can be considered a minor headwind.
Additionally, given the recent backup in bond yields, the High Yield and Emerging Market Bond Breadth Factor shifted from bullish to neutral.
Figure 3: It is interesting how the equity market has shrugged off the recent rate increases. With rates significantly higher over the past few weeks, we wonder if the next leg higher (following the election and into the very seasonably favorable year-end period) might be further buttressed by rates reversing lower, assuming the lower rates aren’t due to some sort of economic hiccup.
The 2024 Cycle Composite illustrates positive year-end tendencies.
Figure 4: The Cycle Composite combines the 1-year, 4-year, and 10-year cycles. Trends are more important than levels.
Volume-adjusted Demand continues to outpace Supply. Historically, this has been a bullish condition.
Figure 5: Demand (buyers) has broken out to new highs relative to Supply (sellers). We go with the flow until it reaches an extreme and reverses. Note the performance difference detailed in the stats box at the bottom of the chart.
Figure 6: Bond sentiment had moved into the Excessive Optimism zone and is now back to neutral levels. A move back below 38, and then a reversal, would support lower yields. (Note: the chart shows prices, not yields.)
Figure 7: Given the importance of earnings meeting or exceeding expectations, we’ll be closely monitoring Positive Earnings Surprises. With 5.77% of companies reporting through October 11th, 75% have reported positive surprises. Last quarter it was 79% (for the full quarter).
Figure 8: On average, earnings estimates have been 8.14% too high for Consensus Earnings Estimates for the next fiscal year. However, the range is wide.
Figure 9: We can see the progression of lower EPS estimates for Q4, from 24.6% on 2-14-2024 to 18.1% on 8-20-2024.
Figure 10: As discussed in previous Updates, earnings hitting the mark are critical given that there isn’t much wiggle room around valuations.
Figure 11: We’re also watching the dollar, which has reversed from Excessive Pessimism levels and is now neutral. A stronger dollar has tended to negatively impact U.S. Corporate earnings. (A 2015 study found that for every 10% rise in the dollar, U.S. multinational companies experienced a 3%- 4% decline in earnings per share.)
Bottom Line: Our models remain supportive, with U.S. equities near all-time highs. Several major models are showing initial signs of weakness, which we’ve seen before. However, at this juncture, 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.
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.
Price-to-earnings (P/E) ratio – A valuation metric that compares a company’s stock price to its earnings per share (EPS) to determine if a stock is expensive or cheap. It’s calculated by dividing the current stock price by the EPS, which is calculated by dividing the last 12 months of earnings by the weighted average shares outstanding.
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