Day Hagan Catastrophic Stop Update October 25, 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.
Several factors continue to underpin our constructive view on equities. Corporate earnings have remained robust, with results generally exceeding expectations and forward guidance holding up well. Expectations are high for strong mega-cap tech spending. Inflation data have shown modest improvement, with the September CPI coming in slightly better than anticipated, reinforcing the sense of “inflation relief.” This has coincided with lower interest rates and a shift in monetary policy expectations, as the Federal Reserve is now broadly viewed as more supportive or at least less restrictive (halting QT as well).
Market leadership has also broadened beyond the mega-cap names, reflecting a healthier underlying breadth. Sentiment, meanwhile, has become excessively pessimistic—a setup that often proves bullish from a contrarian perspective. At the same time, major indexes are making new highs, longer-term momentum/technical signals remain in place, and net fund flows remain supportive. Economic growth continues, albeit at a pace slightly below trend, providing a steady but less inflationary backdrop.
In addition, systematic and algorithmic positioning has moved from elevated to more neutral levels, reducing the risk of forced selling. The corporate buyback blackout period is now ending, removing a temporary headwind and likely providing additional demand for equities. Finally, market chatter around a potential year-end rally is growing, and recent earnings results—both in terms of magnitude and guidance—have generally exceeded expectations, further reinforcing the positive tone in risk assets.
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 given that the S&P 500 is near its all-time high. Historically, such rapid buildups in pessimism have often preceded rebounds, suggesting a greater likelihood 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.
Deutsche Bank has indicated that consolidated equity positioning fell to neutral, a sizeable reset from moderately overweight (CFTC data still spotty due to shutdown). Goldman’s positioning gauges remain relatively subdued, implying scope to add risk if momentum persists. Data this week suggests systematic/CTA exposure isn’t stretched, leaving capacity to buy on strength. Overall, leverage appears mid-range, and positioning is not overly crowded, supporting a grind higher if macro data cooperate.
Figure 3: Positioning indicators and composites have moved to more neutral levels. The 10% Volatility Targeting equity allocation chart below implies that much of the froth has already been worked off.
Seasonality is also a tailwind.
Figure 4: 2025 Cycle Composite
Of course, there are several important risks to keep in view. Rising tariff tensions, particularly China’s potential export controls on rare earth minerals, could pose significant supply-chain and cost pressures. Geopolitical risks remain elevated, with multiple conflicts and political uncertainties creating a fragile backdrop. Retail investors’ heavy exposure to call options also increases the risk of volatility if sentiment shifts abruptly. Meanwhile, liquidity concerns have resurfaced, as stress indicators such as SOFR spreads signal tightening market conditions. Equity valuations remain demanding, and the recent rise in oil prices could re-ignite inflation concerns or squeeze profit margins.
Additionally, as we move toward 2026, delayed profit-taking is possible—particularly as fourth-quarter earnings season approaches. Historically, January has been the third-worst month for equities based on the percentage of positive returns since 2010, suggesting some seasonal vulnerability as investors rebalance portfolios and lock in gains.
Figure 5: Since 2010, January has been positive 56.25% of the time.
From an overbought/oversold perspective, based on the 21-day RSI, the SPY isn’t at max overbought levels. Indicates potential room to the upside.
Figure 6: The SPY with a 21-day RSI.
The gamma condition of the SPX is now rated positive. This condition supports muted volatility (also evidenced by the VIX drop last week).
Figure 7: SPX is in a positive gamma state. Source: Barchart.
The expected move for the SPX, based on 85% of the value of the at-the-money straddle, shows a range of SPX 6,626 to 6,957 heading into the 11-21-2025 expiration.
Figure 8: Expected move based on options pricing. Source: Barchart.
Last week, we wrote, “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. 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.” So far, this view is holding up.
Figure 9: Note how quickly the VIX reversed. VIX expected move for 11-19-2025 is 13.75 to 18.99. ( Source: Barchart and Tastylive)
Figure 10: U.S. economic activity is constructive for equities. The Atlanta Fed’s GDPNow model estimates Q3 GDP to be 3.9% (as of 10/17, next update scheduled for 10-27). As we wrote last week, “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.”
With limited data, investors were focused on the S&P Global US Flash PMI release last week.
Below is text from the report (first three paragraphs). I’m quoting it all because, in my view, it supports our “Economic activity is OK but not great, inflation is trending lower, but not as fast as most investors would like to see” outlook.
“US business activity growth accelerated in October to the second-fastest so far this year, according to early ‘flash’ PMI data, accompanied by the largest rise in new business seen in 2025 to date. Improvements in output and new work were recorded in manufacturing and services, though both sectors signaled falling exports. Factories also reported falling input buying amid a steep drop in backlogs of work and an unprecedented build-up of unsold stock.
Meanwhile, while employment growth picked up, the pace of job creation remained only modest, and weakened especially in manufacturing. Jobs growth was also limited by a worsening of business confidence, principally reflecting ongoing concerns over the impact of government policies such as tariffs. Sentiment was supported, however, by lower interest rates. Prices charged for goods and services rose at the slowest rate since April, but firms’ costs continued to increase sharply, attributed to the impact of tariffs alongside upward wage pressures.”
Figure 11: U.S. Flash PMI illustrates expansion.
U.S. consumer prices increased 0.3 percent month over month in September 2025, moderating slightly from August’s 0.4 percent rise and coming in just below consensus expectations. The largest contribution came from energy costs, which advanced 1.5 percent, driven by a 4.1 percent jump in gasoline prices. Food prices rose modestly, up 0.2 percent, while other areas such as shelter, airfares, recreation, household goods, and apparel also posted gains. These increases were partially offset by declines in motor vehicle insurance, used vehicles, and communication services. The core CPI, which excludes food and energy, rose 0.2 percent, easing from August’s pace and undershooting the 0.3 percent forecast, suggesting that underlying inflation pressures continue to moderate gradually.
Figure 12: The FRB of Cleveland’s 1-year Expected Inflation calculation is 2.74%.
Turning to earnings, the news has been good. Earnings and revenue beats are well ahead of the 5- and 10-year averages (with 29% of S&P 500 companies reporting). Currently, Q3 earnings growth is expected to be a solid 9.2% (y/y), with Q4 earnings now projected to be up 7.4%. Calendar year 2026 earnings are forecast to be up 13.9% y/y.
Figure 13: Q4 2025 forecasts. Source: FactSet.
Upcoming Economic Releases:
Last week, we had CPI and Flash PMI data. This week is likely to be light as well.
Still a toss-up as to whether Federally provided economic releases will be distributed.
Nonetheless, the FOMC meeting on the 29th could be very interesting, especially with regard to the data they are watching and how they’ll interpret it given the shutdown.
Starting to see more calls for a 50 bps move, but we’re expecting a 25 bps cut.
Outside of that, some housing data and regional manufacturing updates.
Figure 14: Economic Calendar for the Week
Bottom Line: The Day Hagan Catastrophic Stop Model closed the week at 50%, signaling a neutral stance toward equities. Corporate earnings remain robust, with 29% of S&P 500 companies reporting Q3 earnings growth of 9.2% year over year and Q4 projected at 7.4%. Inflation eased (September CPI +0.3% m/m; core +0.2%), and the Fed is seen as turning less restrictive, supporting lower rates and broader market leadership. Sentiment has fallen into “excessive pessimism” while the S&P 500 trades near record highs—a historically bullish setup. Positioning is neutral, systematic exposure is moderate, and corporate buybacks are resuming, adding tailwinds into year-end. Risks include tariff tensions, rising oil prices, and elevated valuations, but volatility has moderated (VIX ≈ 16) and economic activity remains solid (Atlanta Fed GDPNow 3.9%). Overall, momentum, earnings strength, and seasonal trends favor a potential year-end rally.
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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 prevailing attitude of investors toward 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 SPX index options with near-term expiration dates, it produces a 30-day forward volatility projection. Volatility, or how quickly prices change, is often seen as a way to gauge market sentiment, particularly 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 (PMIs) – Purchasing Managers’ Indexes are survey-based economic indicators designed to provide timely insight into business conditions.
FOMC Meeting – The FOMC (Federal Open Market Committee) holds 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 prices for a basket of goods and services representative of aggregate U.S. consumer spending.
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