Day Hagan Catastrophic Stop Update October 20, 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.
Figure 1: The Catastrophic Stop model would generate a sell signal by closing below 40% for two consecutive days.
The Day Hagan Daily Market Sentiment Composite has slipped into the “Excessive Pessimism” zone, reflecting a notable rise in investor caution. While this move was anticipated, the speed of the sentiment shift is striking — especially with the S&P 500 still less than 2% below its all-time high. Historically, such rapid buildups in pessimism have often preceded rebounds, suggesting an increased probability of a year-end rally.
Figure 2: The Day Hagan Daily Market Sentiment Composite is now in excessive pessimism territory. A reversal back above 30% would generate a buy signal.
Short-term equity swings often stem from systematic and ODTE flows. These volatility spikes trigger selling, but reversals are typically swift—creating potential buy opportunities if fundamentals remain steady.
Last week, the CBOE VIX surged into the high-20s amid a drop in the S&P 500 on fears of U.S.–China trade escalation and a pending government shutdown. At the same time, the CBOE VVIX — the “volatility of the volatility” index — also climbed, signaling rising uncertainty around future volatility and heightened demand for VIX option hedges. Historically, such VIX spikes (above ~20 and jumping > 20% above recent averages) have often preceded an equity rebound: one study found the S&P 500 rose over the next month in ~65 % of similar cases. ( Source: Tastylive, 2024)
Figure 3: VIX spiked higher. Often presages a short-term positive reversal.
From a longer-term perspective, the 100-Day volatility of the S&P 500, measured as the 100-day simple moving average of daily absolute returns, currently indicates a relatively calm market with historically low price fluctuations and stress.
Figure 4: Longer-term view of equity volatility.
The MOVE Index appears to be peaking and edging lower — a sign that rate expectations are stabilizing. Traders seem increasingly confident that the Fed’s likely path of gradual rate cuts in 2025–26 is now priced in. As Treasury volatility subsides, liquidity and confidence are returning, encouraging flows back into risk assets such as equities and credit. Historically, when the MOVE rolls over, the VIX often follows, paving the way for equity stabilization and potential rallies.
In short, a peaking MOVE typically marks the end of a stress phase. If this trend holds, it’s a constructive signal for markets — suggesting that macro uncertainty is easing rather than intensifying.
Figure 5: The MOVE index (the “VIX of Treasuries”) was also relatively contained last week. Certainly well below levels seen during the March/April decline.
Treasury rates have been declining, which has historically been positive for equities. However, the recent decline is partially due to market concerns over weakening economic data and the ongoing U.S. government shutdown, prompting investors to shift into safer assets, boosting demand for Treasuries and lowering yields. Heightened credit stress in the banking sector (e.g., losses at regional banks) increased risk-aversion, pushing more money into long-duration Treasuries. Rising odds that the Federal Reserve will cut interest rates in 2025–26 helped reduce expectations for future short-term rates, which also pulls down longer-term yields. While the lower rates are stimulative, the reasons behind the decline are concerning. We’re watching closely for indicator changes.
Figure 6: 10-year Treasury Yield.
As described last week, markets are navigating a challenging mix of factors.
We wrote, “The markets are now trying to digest 1) 'Massive Tariffs on China’ (President Trump’s term) of 100%+ due to China’s new rare-earth mineral export restrictions, 2) a government shutdown (reducing the availability of economic data), and 3) potential uncertainty around upcoming Q3 earnings reports. (Not to mention the impacts to the Japanese carry trade, geopolitical risks, etc.)
While it seems like the markets have a lot to deal with, and we’re definitely on our toes trying to peer through the crosscurrents, we reiterate our view that U.S. economic data remains constructive, inflation pressures are likely to trend lower, the Fed is more dovish than hawkish, global central banks are generally leaning dovish, global financial liquidity is positive, and U.S. corporate earnings are expected to continue to grow at a double-digit pace into 2026.
If the equity markets do retrace significantly, absent an economic shock or massive negative earnings revisions, given the current data, it would likely be a buying opportunity. We’ll be monitoring our models for signs of selling exhaustion, oversold extremes, and excessive pessimism to identify potential turning points. As long as corporate earnings and guidance hold up, we will likely maintain this view.
In light of the turbulence, it’s helpful to revisit the events of March–April 2025 for context.
History often provides a useful perspective: In March–April 2025, markets fell sharply as U.S. “Liberation Day” tariffs ignited global stagflation fears. The S&P 500 lost nearly 20% (intraday), Treasuries sold off, and the Tech sector led declines. Inflation stayed elevated, delaying Fed rate-cut hopes. Growth forecasts were trimmed, volatility spiked, and defensive sectors briefly outperformed before a partial rebound. It took 90 trading days (129 calendar days) from the February 19th peak for the S&P 500 to regain new highs.”
Figure 7: It took 90 trading days to recover from the last tariff shock.
The net takeaway is that despite ongoing worries about economic growth, inflation, elevated interest rates, valuations, supply-chain strains, and rising geopolitical tensions, investors ultimately looked beyond the potential tariff disruptions—refocusing on resilient corporate earnings and rekindling their enthusiasm for artificial intelligence.
Figure 8: The S&P 500’s 10-day rate of change (using a 5-month z-score) measures OBOS. This indicator never quite made it to significantly oversold levels, but did get to levels consistent with other dips.
Figure 9: Positioning indicators and composites have moved to more neutral levels. The 10% Volatility Targeting equity allocation chart below shows that much of the froth has already been worked off. You can see where positioning was at the 2020, 2022, 2024, and 2025 lows. These charts are very helpful in identifying the level of potential future demand.
The (inferred) DBMF exposure to equities has also moved lower. Note that when the exposure levels decline below 0%, it has usually provided a useful contrary buy signal. DBMF is designed to mirror the average futures exposures of large CTAs, a lower equity weighting signals systematic de-risking across that cohort — often triggered by higher volatility, cross-asset correlation spikes, or tightening financial conditions. A lower DBMF equity allocation usually means systematic trend funds are moving to neutral or short equities, reflecting fading momentum and rising volatility — a signal of broad risk aversion, but also one that can set up future re-risking if volatility stabilizes.
In recent weeks, DBMF’s daily transparency feed has shown declining equity and bond exposure and a shift toward long USD/short commodities, consistent with a more cautious, defensive macro regime.
Figure 10: DBMF’s lower exposure to equities indicates some momentum loss but can also serve as a foundation for a rally as systematic funds re-risk.
Figure 11: Last week, we wrote, “We can’t help but wonder if this pullback is creating a better opportunity for a year-end rally. Will President Trump soften the rhetoric? It didn’t take long, or much in the way of finding common ground, for the equity market to regain its uptrend last time.”
Figure 12: U.S. economic activity is constructive for equities. The Atlanta Fed’s GDPNow model estimates Q3 GDP to be 3.9%. That’s probably high, but it does indicate that activity is positive. To date, the Citigroup Economic Surprise Index (not shown) is also in positive territory, indicating that U.S. economic releases have been beating estimates, on average, over the last three months.
The NFIB report was released on October 15th and provided a series of mixed signals. A good example is the survey’s labor market observations. “Job openings are trending lower,” but they “remain above the historical average as owners struggle to fill new job openings. Hiring plans are at the highest levels since January.”
Also mixed: “More firms reported declining sales than reported gains.” However, earnings trends improved (though still negative in the survey).
The net takeaway is that there was a slight decline in the survey. Much of it is predicated on economic and policy-related visibility, given the NFIB’s Uncertainty Index now resides at the fourth-highest reading in over 51 years.
Figure 13: NFIB Small Business Optimism Index declined but is still mid-range. (Source: NFIB Research Center)
Figure 14: Global liquidity, based on M2 Money Supply, remains constructive.
Figure 15: Based on the 5-year breakeven inflation rate, inflation pressures are diminishing.
Figure 16: With 12% of companies reporting, 86% have beaten estimates versus the 10-year average of 75%. We do note that the magnitude of upside surprises is lower than what has been seen over the past 5- and 10-year periods. Nevertheless, earnings growth expectations for 2026 have increased from 13.8% to 13.9% since September 30.
Figure 17: Earnings revisions, to date, are positive and supportive.
Upcoming Economic Releases:
Still a toss-up as to whether Federally provided economic releases will be distributed.
We’ll be watching the PMI releases on Friday.
The NFIB report, in lieu of other economic data, tells us:
The index fell 2.0 points to 98.8 in September, after three gains in a row.
It remains just above its 52-year average of 98, but the decline signals rising caution.
Key worries from small businesses include inflation/input cost pressures, supply chain disruptions (reported by 64% of respondents), and slowing sales expectations.
The Uncertainty Index jumped to 100, one of the highest readings in its history, indicating heightened policy- and economic-outlook risk. On the bright side, profit trends improved (highest since December 2021) and hiring plans edged up slightly.
Bottom line: While small business optimism remains moderate, the drop and surge in uncertainty suggest that even resilient Main Street firms are becoming more conservative — potentially leading to softer hiring, slower inventory build-up, and cautious investment unless clarity improves.
Figure 18: Economic Calendar for the Week
Bottom Line: Global markets are facing renewed volatility due to the possibility of “Trade War 2.0.” The tariffs may threaten key U.S. tech and manufacturing supply chains, with sectors from semiconductors to autos bracing for disruption. Investors are now watching for a possible Trump-Xi meeting, while earnings and data will dominate the week. Major banks will report results, offering insight into loan demand, credit quality, and economic momentum, while the potential release of PPI and retail sales tests inflation and consumer resilience amid higher import costs. Fed Chair Powell’s Tuesday speech may shape expectations on policy risks from tariffs and the shutdown. Tech and healthcare earnings will further gauge economic and geopolitical stress.
While we expected near-term consolidation, we didn’t expect the magnitude of the tariff salvo. As long as economic activity holds up and, more importantly, corporate earnings continue to grow, we aren’t expecting a big bear market.
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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.
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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 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.
OBOS Indicators – Overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price with the trade margin of the given period.
NFIB – The National Federation of Independent Business advocates on behalf of America’s small and independent business owners.
Purchasing Manager Indexes (PMI) – Purchasing Managers’ Index is a survey-based economic indicator designed to provide a timely insight into business conditions.
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.
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 pcires for a basket of goods and services representative of aggregate U.S. consumer spending.
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