Day Hagan Catastrophic Stop Update October 22, 2024
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The Catastrophic Stop model declined to 62.9% from 72.9% last week. The Internal Composite is bullish, and the External Composite is neutral.
Figure 1: Catastrophic Stop Modeo vsl S&P 500 Total Return Index
The model’s move lower was primarily due to the Baltic Dry Index Factor reversing to a sell signal. The indicator continues to oscillate between buy and sell signals as it seeks to latch on to the next sustainable trend. The Catastrophic Stop model has moved closer to neutral, setting it up to generate a sell signal more quickly if conditions warrant.
Figure 2: Baltic Dry Index Factor vs. S&P 500 Total Return Index
The Daily Sentiment Index (DSI) has reversed from Extreme Optimism levels. Historically, this has been a near-term headwind for equities and confirms readings from the Daily Sentiment Composite (discussed last week).
Figure 3: S&P 500 Index vs. S&P 500 Daily Sentiment Index
Momentum continues to favor the bulls. However, when the indicator below reverses back below the top bracket (Figure 4), it will signal that buying pressure is diminishing.
Figure 4: S&P 500 Index vs. Momentum Reversals.
Shorter-term, U.S. equity indexes have been working off recent overbought conditions. A move to oversold and then a reversal would likely provide a good setup for a year-end rally.
Figure 5: S&P 500 Index vs. Overbought/Oversold Indicators
From a longer-term perspective, credit spreads (option-adjusted spreads) continue to portray a normally functioning market where investors are not pricing in any major financial dislocations.
Figure 6: OAS on Corporates, High Yield, Mortgages, and Agencies
Moreover, the Citi U.S. Economic Surprise Index is now above 0%, indicating that investors are no longer overly optimistic about their economic activity expectations. (The Index measures economic releases relative to consensus estimates.) This is a bullish underpinning as we head into a favorable seasonal year-end period.
Figure 7: S&P 500 Index vs. Citigroup U.S. Economic Surprise Index
Global market breadth is also positive, with 72.3% of ACWI markets above their 200-day moving averages and 91.5% supported by rising 200-day moving averages.
Figure 8: MSCI All Country World Index vs. 200-Day Moving Average Indicators
Global Central Bank policies are also supportive longer-term, with 73.5% of central banks cutting rates at their last meetings.
Figure 9: MSCI All Countries World Index vs. Breadth of Central Bank Rate Changes
The 6-month implied forward Treasury Bill Rate indicates that investors are now pricing in less than 50 bps of cuts over the next six months (46 bps to be precise). With rate cut hopes now more rationally priced in, investors will likely start to focus more on earnings, rather than central bank activity.
Figure 10: 6-Month Implied Forward Treasury Bill Rate
According to FactSet, the Magnificent 7 are expected to show year/year earnings growth of 18.1%. The expected earnings growth for the remaining 493 companies is just 0.1%. Together, Q3 y/y earnings are expected to be up 3.4%. They also note that “Analysts predict the companies in the Magnificent 7 in aggregate will report double-digit earnings growth over the next five quarters as well. However, it is interesting to note that analysts believe the other 493 companies in the index will also report double-digit (year-over-year) earnings growth over the next five quarters. As a result, the S&P 500 overall is also expected to report double-digit earnings growth rates of 14.0%, 13.8%, 13.0%, 17.1%, and 15.4% for Q4 2024, Q1 2025, Q2 2025, Q3 2025, and Q4 2025, respectively.”
Figure 11: S&P 500 Earnings Growth (Y/Y): Q3 2024
Earnings growth expectations outside of the Mag 7 are positive. It’s time for the troops to support the generals.
Figure 12: S&P 500 Earnings Growth (Y/Y)
Bottom Line: The long-term uptrend remains intact as we enter the seasonally favorable year-end period. Nonetheless, there are pockets of excess optimism and overbought conditions that will likely hamper near-term progress. As those conditions are worked off, the odds of a year-end rally will increase.
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.
Baltic Dry Index Factor - Is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel. The Baltic Dry Index is a composite of four sub-indices that measure different sizes of dry bulk carriers or merchant ships: Capesize, Panamax, Supramax, and Handysize.
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.
MSCI All Country World Index (ACWI) – is a stock index designed to track broad global equity-market performance. The Index comprises the stocks of nearly 3,000 companies from 23 developed countries and 24 emerging markets.
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