Day Hagan Catastrophic Stop Update September 22, 2025
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The DH Catastrophic Stop model level is 50%, indicating that investors should maintain their benchmark equity exposure.
As we’ve noted over the past several weeks, 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 continue to 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 remains at 50.0%. A decline below 30, followed by a reversal back above, would likely be a good setup for a year-end rally.
Interestingly, the most recent AAII Investor survey shows that for the Bullish Sentiment component, “expectations that stock prices will rise over the next six months, increased 13.6 percentage points to 41.7%. Bullish sentiment is above its historical average of 37.5% for the first time in seven weeks.” It is the highest reading since July 9th. (Source: AAII)
In the old days, this time series was often used as a contrary indicator. These days, however, we wouldn’t recommend getting in front of the retail army. We’ll go with the flow until the indicator reaches an extreme and then decisively reverses.
Figure 2: Sentiment remains in the neutral zone.
Positioning remains elevated. Nomura points to Volatility Control Funds at maximum allocation and CTAs at a net 93.6% of estimated equity exposure, while DB notes that Discretionary Investors increased their exposure to a neutral 44th percentile; the GS U.S. Equity Sentiment Indicator is showing a neutral -0.3.
Figure 3: Systematic and algo-driven strategies equity exposure near max levels.
The SPX is re-entering overbought territory. Coupled with the approaching buyback blackout period, we are maintaining our neutral outlook.
Figure 4: Overbought conditions back in play near term.
The S&P 500 index is currently supported by a positive gamma condition (which helps to mute volatility). The gamma condition flips to negative below 6563.72 as of the time of this writing.
Figure 5: SPX Gamma condition is positive.
The VIX isn’t worried.
Figure 6: CBOE Volatility Index.
The MOVE Index isn’t either. Note that there is an inverse correlation between bond volatility and equity performance.
Figure 7: MOVE Index.
The Fed Factor: Investors and wirehouses are now pricing in 2 to 3 rate cuts by year-end. Markets are clearly focused on the ebb and flow of rate cut probabilities. Nonetheless, the Fed is supportive, and that’s constructive.
JPM notes that it has been about nine months since the previous rate cut. They also note that “in the second year of an easing cycle, the S&P 500 on average is up 26.5%, assuming no recession, compared to a 13.7% gain in the first year. The equity markets already outsized 17.6% appreciation in the first 12 months of the current easing cycle shows an above-average momentum supported by the AI theme.”
Figure 8: Investors are expecting the Fed Funds rate to be 3.06% this time next year. (Steetstats.)
Credit spreads remain tight. Constructive for equities.
Figure 9: U.S. High Yield OAS still tight.
Perhaps surprisingly, given the geopolitical upheavals abroad, the Euro High Yield OAS is also tight.
Figure 10: Euro High Yield OAS is still tight.
Speaking of international, the U.S. dollar index is approaching its 50-day moving average. A decisive break above could lead some analysts to reduce earnings estimates for multinationals. We’re not concerned yet, but we're watching this development closely. If rate cut expectations start to soften (considering the PCE release later this week) and the dollar strengthens in response, it would be another headwind.
Figure 11: U.S. dollar index.
Speaking of earnings, earnings revision breadth is still supportive of equities.
Figure 12: 3-month net earnings breadth is strong at the highest level in 20 years.
Please note that there has historically been a slight seasonal weakness over the next couple of weeks. (Pension selling and a buyback blackout.)
Figure 13: Calendar of Economic Releases
Figure 14: Upcoming economic data.
Is it me, or are there a lot of Fed members wanting to be seen and heard?
This week, we’ll be focused on Tuesday’s Flash PMIs and Powell speaking, Thursday’s Initial Unemployment Claims, and Friday’s PCE data. Housing remains an issue, so both new and existing home sales data will be of interest.
Conclusion: 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 constructive.
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.
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.
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.
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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