Day Hagan Catastrophic Stop Update September 15, 2025
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The DH Catastrophic Stop model level is 50%, indicating that investors should maintain their benchmark equity exposure.
Our models and indicators suggest an overall neutral outlook. Historically, equities have typically appreciated during such neutral periods, as indicated by our models. As a result, while we anticipate a likelihood of short-term consolidation, we do not foresee a major downturn on the near-term horizon.
Figure 1: The Day Hagan Catastrophic Stop model is neutral at 50%.
The DH Daily Market Sentiment Composite declined to 57.6%, showing that investor sentiment remains at the higher end of the neutral range. A decline below 30, followed by a reversal back above, would likely be a good setup for a year-end rally.
Figure 2: Sentiment continues to reverse from the recent peak in excessive optimism.
Positioning data shows: 1) GS’s U.S. Equity Sentiment Risk Indicators closer to “light positioning,” 2) Macrobond shows CTAs and Asset Managers at “high neutral,” 3) DB shows Consolidated Equity Positioning at 66%, which is deemed “Modestly Overweight,” 4) GS also shows that U.S. Fundamental Long/Short gross leverage is in the 98th-percentile on a 3-year lookback, but net exposure is 45th-percentile on a 3-year lookback, 5) GS also shows that U.S. Fundamental Long/Short ratio is at the 12th-percentile on a 3-year lookback.
In other words, equity exposure is modestly elevated but not overly extended.
Figure 3: Vol-targeting funds’ aggregate equity exposure toward the middle of the 8-year range, but a bit extended if looking at just the past five years.
Based on the equity exposure levels we previously discussed, we wanted to analyze potential hedging activity to provide further confirmation of our perspective. The chart below indicates that the current hedging activity could be best characterized as neutral. Historically, high levels of hedging have been beneficial for equities over time. The chart below includes hedging measures for the S&P 500, NASDAQ 100, and DJIA.
Figure 4: Hedging activity is viewed as neutral. We would be much more concerned if hedging levels were low. Sentimentrader writes, “This chart reflects positions of hedgers and small speculators in the S&P 500, Nasdaq 100 and DJIA futures. It combines the full contract and e-mini, adjusting for contract size, and calculates the dollar value. The chart as shown is a one-year stochastic of hedger positions minus speculator positions, so if it reads 100, then hedgers are the most exposed to stocks in at least a year, and speculators are the least exposed. This is computed as a non-contrary indicator, so when the Combo is extremely high (an indicator reading above 80), it can be a good sign for stocks. Conversely, readings below 20 are usually a negative sign for stocks.”
A similar view of hedging is gleaned from the S&P 500-only calculations.
Figure 5: S&P 500 hedging is neutral.
We’re keeping an eye on the SPX 6,463 level, as that is where the SPX Gamma condition would flip to negative, potentially exacerbating a downside move. The current positive gamma condition is helping to mute volatility.
Figure 6: Below 6,463 (not shown on the chart), volatility would likely increase. (Note: This figure changes daily.)
The expected SPX range into Friday’s OPEX is 6,546 to 6,668.
Figure 7: Expected move based on 85% of the value of the at-the-money-straddle. Source: Barchart
Turning to fundamentals, S&P 500 earnings revisions continue to trend positively (13-week view).
Figure 8: S&P 500 earnings revision breadth = (Upward Revisions – Downward Revisions) / Total Revisions. Constructive.
The S&P 500 Valuation Heatmap below indicates that if the forward earnings forecast increases by 5% and interest rates decrease by 50 bps (for the real 5-year interest rates), then the projected level for the S&P 500 would be 6,978. At this point, this appears to be a reasonable expectation.
(The Heatmap uses a two-stage DCF for S&P 500 valuation, with a five-year growth phase and a terminal stable growth phase. The 5-Year Treasury yield sets the risk-free rate for initial cash flows, while the 5-Year Forward 5-Year Yield covers years 6–10. Inflation expectations from the Cleveland Fed adjust real growth rates to nominal rates, isolating the impact of inflation. Source: StreetStats.)
Figure 9: Continued earnings growth and the potential for lower rates are constructive in the longer term.
The U.S. Economic Surprise Index illustrates that economic releases have been better than expected, on average, over the last three months.
Other countries/regions supported by positive Economic Surprise Index levels include the Eurozone, Japan, the U.K., Australia, Switzerland, Sweden, and Emerging Markets.
Negative ESI = China, Latin America, and Canada.
Figure 10: Economic reports for the U.S. have generally been better than expected, but the level recently peaked. Watching closely.
Given the recent weakness around employment, talks of a hard landing have intensified (as have talks of rate cuts). While we understand the concern, in past Updates, we have discussed several factors that would need to shift negatively before our models mandate major changes to the portfolio. We feature a few below.
First, we like to keep an eye on the trend of the Atlanta Fed GDPNow real GDP estimate. While far from perfect, it does provide a real-time, data-driven viewpoint using 13 subcomponents (PCE, private investment, exports, government spending, and the subcategories for each).
Figure 11: Atlanta Fed GDPNow = so far, so good for Q3 economic activity. Current reading is +3.1% (personal consumption and private domestic investment are solid).
The Weekly Economic Index, at 2.24 as of September 6, 2025, tracks real economic activity using ten high-frequency series on consumer behavior, labor, and production, scaled to four-quarter growth in GDP. Components include Redbook sales, the Rasmussen Consumer Index, unemployment claims, tax withholdings, railroad traffic, staffing, steel production, fuel sales, and electricity load, all expressed as year-over-year changes and aggregated into a single weekly index.
Figure 12: WEI forecasting trend economic growth. The WEI reading of 2.24 percent suggests that GDP has increased by 2.24% compared to the same period last year.
The St. Louis Fed’s Financial Stress Index level of -0.4211 (as of September 5) indicates that stress is minimal based on 18 weekly data series, including interest rates, yield spreads, and volatility indicators. Zero represents normal conditions; positive values indicate above-average stress, and negative values indicate below-average stress.
Figure 13: War, tariffs, BBB, trade tensions, political turmoil, and a spike in energy prices weren’t enough to stress out the financial markets for more than a few days this year. But we are monitoring the recent increase.
Figure 14: The annual inflation rate has ticked up from 2.73% in July to 2.93% in August, but the 10-year Treasury yield has declined from 4.79% in January to 4.06% today. This indicates that the bond market is looking past potential inflation hiccups and focusing on rate cuts. Three cuts are now priced in over the rest of 2025.
Upcoming Reports We’ll be Watching Closely
Last week, Consumer Credit, NFIB, PPI, and the 10- and 30-year Treasury auctions went well. CPI and Unemployment Claims were negative surprises. The job revisions update was one of the most “widely anticipated shocks” I’ve seen in a while. Bottom Line: Economy showing modest growth for now, and inflation not spiking higher (confirmed by bond yields).
This week, the focus will be on Wednesday’s FOMC meeting and the Summary of Economic Projections. Additionally, Unemployment Claims, housing data, and retail sales will provide insight into the state of the consumer.
Figure 13: Calendar of Economic Releases
Our perspective remains relatively unchanged, with excessive optimism having moderated, and most of our indicators and models residing in neutral territory. We have been anticipating a consolidation phase as sentiment and technical indicators trend toward more normalized levels. Long-term indicators continue to support a positive outlook for the market. We note that forecasts for U.S. economic activity are generally constructive, while inflation remains sticky but is expected to decline in the longer term. Rate cut expectations are also constructive (September 25 bps rate cut odds over 95%, 50 bps around 6%). All eyes will be on the FOMC.
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.
NASDAQ 100 Index – Is an index that aggregates the largest 100 nonfinancial companies listed on the Nasdaq exchange, spanning a wide array of industries like technology, healthcare, and consumer staples. While it excludes financial sector companies, it offers a diverse representation of the market’s most dynamically traded entities.
Dow Jones Industrial Average (DJIA) – Is the aggregate dividend yield on the 30 stocks that make up the Dow Jones Industrial Average. The DJIA is one of the most widely watched market ideas in the financial markets and is considered a bellwether of the U.S. economy.
NFIB – The National Federation of Independent Business advocates on behalf of America’s small and independent business owners.
Producer Price Inflation (PPI) – Measures the average change over time in the prices domestic producers receive for their output. It is a measure of inflation at the wholesale level that is compiled from thousands of indexes measuring producer prices by industry and product category.
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.
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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