Day Hagan Catastrophic Stop Update September 2, 2025
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The DH Catastrophic Stop model level is 50%, indicating that investors should maintain their benchmark equity exposure.
Our perspective has remained relatively unchanged over the last three weeks: The excessive optimism noted four weeks ago has slightly moderated, and we have been anticipating a consolidation phase as sentiment and technical indicators trended toward more normalized levels. We will closely monitor overbought and oversold conditions to identify potential reversals before issuing new buy signals.
Long-term indicators continue to support a positive outlook for the market. We note that forecasts for U.S. economic activity have been trending higher, while inflation remains sticky but is expected to decline in the longer term. Rate cut expectations are constructive (September rate cut odds over 90%). All eyes will be on Thursday’s initial unemployment claims number (expecting 230k) and Friday’s employment report (expecting nonfarm payrolls +75k and the unemployment rate to tick up to 4.3% from 4.2%).
Figure 1: DH Catastrophic Stop Model. The model's neutral level allows it to potentially trigger a sell signal more rapidly if conditions warrant.
The Day Hagan Daily Market Sentiment Composite remains on a sell signal, reflecting a shift in investor sentiment from excessive optimism to a neutral stance. Historically, this transition acts as a headwind for equities until excessive optimism subsides, typically indicated by a drop below the 30 threshold, which signals the transition into excessive pessimism.
We note that retail investor sentiment in the U.S. remains subdued. Positioning in mega-cap growth and tech—a sector that has driven market gains for years—sits at just the 42nd percentile. This suggests investors aren’t fully engaged in the names that could lead the next leg higher. Contrarians may view this as an opportunity to selectively add exposure to high-quality growth and tech.
Conversely, CTA positioning in U.S. equities is at its maximum at the 100th percentile. If the tape turns lower, systematic selling could exceed $70 billion, putting pressure on stocks (confirmed by Goldman Sachs and Citadel).
At the same time, option positioning is neutral. The put-call skew across S&P 500 single-stock options is roughly at its three-year average, indicating that investors—both retail and institutional—are not leaning heavily toward either bullish or bearish scenarios. For investors, this means the market isn’t priced for extreme outcomes.
Figure 2: Investor sentiment is being reset as illustrated by the DH Daily Market Sentiment Composite declining below 70. A decline below 30 would be a nice setup for a year-end rally.
Seasonality remains challenging, with potential weakness into mid-September, after which a year-end rally is expected to begin. Seasonality indicators often “rhyme,” but we don’t expect pinpoint accuracy. Their usefulness is limited to identifying headwinds vs. tailwinds, i.e., defining a market condition as opposed to an actionable signal.
Figure 3: Seasonality is rated as a minor headwind. History reminds us that September tends to be one of the toughest months for stocks. Over the past decade, the S&P 500 has often stumbled this time of year. When the index closes in August at an all-time high, September has been negative 14 of 18 times, with an average loss of -1.6%. For investors, this doesn’t necessarily call for exiting positions—but it does suggest a month where patience and risk management are key. Pullbacks could offer buying opportunities in favored areas.
Seasonality data for the SPX indicate that September is the weakest month of the year, on average, since 2010.
Figure 4: Historical SPX monthly returns.
Keep an eye on the VIX. A reading below 20 has generally been constructive for equities.
Figure 5: VIX getting close to 20, a potentially important inflection point.
The expected range for the SPX heading into the 9-19 expiration is between 6,239 and 6,525. Today’s decline is within expectations. While it may feel worse, as of this writing, the SPX is just -1.84% below its all-time high (6,388 vs. 6,508).
Figure 6: Expected move based on 85% of the at-the-money straddle.
The SPX is currently in a negative gamma condition, indicating that volatility is likely to remain elevated (negative gamma = dealers must sell on the way down and buy on the way up). Keep in mind that negative gamma works both ways.
Figure 7: SPX Gamma data indicates a negative gamma condition.
U.S. economic forecasts are generally trending higher, as are expectations for global growth. The Fed GDPNow real GDP estimate for Q3 is 3.0%.
Figure 8: Atlanta Fed GDPNow real GDP Estimate indicates above-trend annualized growth in Q3.
The inflation composite below is based on commodity prices, PPI, hourly wages, and the CPI. While the composite has increased recently, levels are still likely to support a Fed cut in September of at least 25 bps. (Source: Street Stats)
Figure 9: Inflation is sticky, but likely not a deterrent to a rate cut or two.
Lastly, earnings revisions for the S&P 500 over the past three months have continued higher. This is a significant support for equity prices.
Interestingly, FactSet writes, “The third quarter marks the first time analysts have increased EPS estimates in aggregate during the first two months of a quarter since Q2 2024 (+0.3%).” For Q3, earnings forecasts are for 7.5% y/y earnings growth and 6.1% revenue growth. Also, keep in mind that analysts are currently projecting earnings growth of 13.4% for 2026.
Figure 10: Earnings estimates continue to be revised higher on average.
Upcoming Reports We’ll Be Watching Closely
We’ve got a huge week of data releases coming up. JOLTS on Wednesday, ADP, Services PMIs, and Initial Unemployment Claims on Thursday, and the Employment Report on Friday. By the end of the week, September’s fortunes should be clear.
Today, the S&P Global US Manufacturing PMI for August came in at 53.0, slightly below consensus but still in expansion territory. They note, “US manufacturing operating conditions improved to the greatest degree in over three years during August amid a surge in production and solid growth in new order books. Firms also took on workers to a greater degree amid evidence of capacity constraints.”
ISM also released its version, which came in at 48.7, below consensus and in contraction territory. The index did increase by 0.7 points. New Orders, Employment, Supplier Deliveries, Inventories, and New Export Orders improved. Production, Customer’s Inventories, Prices, Backlog of Orders, and Imports were negative.
The net result is that manufacturing is still attempting to stabilize but isn’t currently a major drag on economic activity. Note: The ISM Manufacturing PMI is based on surveys of U.S. supply chain managers, with a strong focus on large, established firms. The S&P Global U.S. Manufacturing PMI surveys a broader set of companies, including smaller and mid-sized firms. Both track manufacturing activity, but ISM is older and tends to be more market-moving.
Figure 11: Upcoming U.S. economic releases.
Conclusion
A lot of new information will be available to process this week. Nonetheless, balancing modestly higher bond yields, ongoing political and Fed policy uncertainty (though leaning more dovish), tech and AI stock weakness, tariff-related volatility, seasonal September risk, potential Fed rate cuts, broad corporate earnings strength, solid consumer spending, still-good capital flows into ETFs (mostly by retail), and safe-haven inflows (like gold, signaling defense) ultimately leads to the same conclusion: Some excesses still need to be worked down, but given the better economic outlook, supported by corporate earnings forecasts, we currently don’t expect an extended decline. Should our models shift more negatively, we will quickly move to reduce risk.
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.
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trl
Sarasota, FL 34236
Toll Free: (800) 594-7930
Office Phone: (941) 330-1702
Website: https://dayhagan.com or https://dhfunds.com
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.
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.
Gamma – Is an options risk metric that represents the sensitivity of an option’s delta to movements in the underlying asset, indicating how much delta will change when the underlying price shifts by one point. Therefore, gamma is a measure of how the rate of change of an option’s price will change with fluctuations in the underlying price. The higher the gamma, the more volatile the price of the option is.
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.
JOLTS Report – Is a monthly report from the U.S. Bureau of Labor Statistics (BLS) that provides information on the state of the job market.
Purchasing Manager Indexes (PMI) – Purchasing Managers’ Index is a survey-based economic indicator designed to provide a timely insight into business conditions.
Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Asset Management, any of its affiliates or employees, or any third-party data provider shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. Day Hagan Asset Management accounts that Day Hagan Asset Management or its affiliated companies manage, or their respective shareholders, directors, officers, and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. Day Hagan Asset Management uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of Day Hagan Asset Management’s past recommendations and model results is not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trail, Sarasota, FL 34236
Toll-Free: (800) 594-7930
Office Phone: (941) 330-1702
Websites: https://dayhagan.com or https://dhfunds.com
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