Day Hagan Catastrophic Stop Update September 28, 2026
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Summary
The Day Hagan Catastrophic Stop Model rose to 59.09% from 50.0% last week as the Daily Market Sentiment Composite rebounded from extreme pessimism (see the second chart below). The model continues to support benchmark-level equity exposure.
Figure 1: The model remains constructive, although its margin of safety is still narrow. A reading below 40% for two consecutive days would trigger a sell signal and call for reduced equity exposure or higher cash levels.
The S&P 500 closed Friday at 7,743, while the Day Hagan Daily Market Sentiment Composite finished at 30.85, reversing back above its extreme-pessimism threshold of 30. The chart shows caution persisting despite the index’s strength. That can provide a constructive contrarian backdrop, though sentiment alone is not a buy signal. AAII’s latest survey showed 48.1% bearish versus 32.7% bullish; by contrast, the VIX closed Friday at a relatively subdued 14.87.
Figure 2: Sentiment continues to illustrate significant investor pessimism.
Only 27.81% of Russell 3000 stocks closed above their 50-day moving averages Friday, below the chart’s 30% threshold, even as the S&P 500 remained near its highs. The gap signals narrow market participation and widespread short-term weakness. Breadth is approaching oversold territory, but that alone does not confirm a market bottom.
Figure 3: Breadth still narrow = caution flag.
At −17.73, high-yield breadth resembles readings seen during several prior market pullbacks, when selling pressure was followed by rebounds. It is less severe than the deepest readings in 2020 and 2022. The signal warrants attention, but a low reading alone cannot confirm that stocks or riskier bonds have bottomed. Credit stress is significant, though not yet consistent with market capitulation.
Figure 4: High-yield breadth signals caution.
Friday’s chart shows tight cash credit spreads: investment-grade at 80 basis points and high-yield at 294, both below their historical averages. CDS gives a more cautious reading: CDX investment-grade had widened eight basis points month-to-date through Thursday. The flies in the ointment are weak high-yield breadth and pressure on lower-rated borrowers. Higher Treasury yields can raise refinancing costs and reduce bond prices even while spreads remain tight.
Figure 5: U.S. Credit spreads (OAS) still tight.
Our Market Focus Scorecard stands at 3.75/10. Earnings growth and AI investment provide support, but higher yields, tighter Fed policy, and narrow market breadth leave little cushion. Growth projections remain strong, though they differ: the Atlanta Fed’s GDPNow model estimates third-quarter real GDP growth at 5.0% annualized, while the St. Louis Fed’s nowcast is 3.2%. This week’s job openings, private payrolls, and Friday employment reports will test the labor score. Moderate hiring could support consumers while easing rate pressure; a sharp slowdown would raise questions about earnings and credit.
Figure 6: Several major longer-term factors influencing the market are becoming less supportive.
The S&P 500 sits just 0.7% below its 52-week high, but its median stock is down 16%. That is a sizable correction beneath the index’s supposedly calm surface. Historically, a median-stock decline of this magnitude has coincided with an index drawdown near 10.2%, making today’s gap unusually wide. This signals narrow leadership, not an inevitable index decline. Broader participation could close the gap; until then, the market remains vulnerable if its largest winners falter.
Figure 7: The cap-weighted index is masking deeper declines by individual stocks and sectors.
Portfolio Outlook
The S&P 500 remains above both key moving averages, but sector participation is thin. Only four of 11 sectors trade above their 50-day averages. Technology has strong year-to-date returns and momentum; Energy has gained even more this year, though its RSI has cooled. Real Estate, Utilities, Financials, and Consumer Discretionary show particular short-term weakness. The chart’s strong earnings-growth estimate supports the index, while its 19.2-times forward valuation leaves less room for disappointment if leadership narrows further.
Figure 8: S&P 500 Sector Fundamentals and Technicals. Technical shading: green = strong; yellow = neutral/mixed; red = weak.
Sector Weekly Updates:
For the week ended Friday, September 25, 2026, the S&P 500 gained 1.2% on a price-return basis, the Nasdaq Composite rose 2.1%, and the Dow advanced 0.3%. Technology and Communication Services led, while Utilities and Energy posted the largest sector ETF losses. The rally began as oil and Treasury yields eased, but renewed rate pressure later in the week kept gains concentrated. Note: The Federal Reserve’s increase to a 3.75%–4.00% target range occurred the previous week, on September 16.
Consumer Discretionary declined 0.4%. The sector was comparatively steady despite higher financing costs and questions about household purchasing power. Investors continue to distinguish businesses with dependable demand from those more exposed to financed purchases. The modest weekly loss offers little evidence of a broad recovery in discretionary shares.
Consumer Staples declined 0.9%. Defensive characteristics did not prevent a loss as rising bond yields competed with dividend-paying stocks. Essential demand remains a support, but margins still depend on how well companies manage labor, transportation, and input costs without losing volume.
Communication Services gained 1.9%. The sector rebounded as enthusiasm for Meta’s consumer AI agent helped restore interest in large digital platforms. That strength improved the weekly result, although advertising, subscriber economics, content costs, and capital spending still create considerable differences among companies.
Energy declined 3.5%. It was one of the week’s weakest sectors as oil eased amid hopes for diplomatic progress in the Middle East. Energy still offers exposure to supply risk and inflation, but the reversal shows how quickly that support can fade when the perceived risk premium falls.
Financials declined 1.8%. Higher Treasury yields did not translate into a sector gain. Rising funding costs, rate volatility, and uncertainty about future credit demand remain important counterweights to improved yields on new assets.
Health Care gained 1.4%. The sector advanced despite the market’s narrow leadership. Its less cyclical demand can provide balance when rates and energy prices unsettle investors. The weekly gain is encouraging, but company-level earnings and policy exposure remain more useful guides than a single sector-wide move.
Industrials gained 0.4%. The small advance contrasted with the prior week’s loss. Defense, power infrastructure, and manufacturing investment remain potential longer-term supports, while higher financing and operating costs make execution and cash-flow conversion especially important.
Information Technology gained 3.5%, leading all sectors. Renewed enthusiasm for AI and semiconductor demand helped drive the market’s rebound. Strong earnings opportunities remain, but the size of the weekly move also underlines how much the broader index depends on a relatively concentrated group of growth companies.
Materials declined 0.4%. The sector finished only modestly lower despite pressure from interest rates and uncertainty about industrial demand. Infrastructure and electrification provide longer-term opportunities, but a broader advance would require firmer evidence of improving orders, margins, and commodity demand.
Real Estate declined 2.3%. Higher Treasury yields continued to challenge the relative appeal of property income and raised concern about refinancing costs. Operating conditions differ substantially across property types, so balance-sheet strength and the timing of debt maturities remain key.
Utilities declined 3.9%, the weakest sector. Rising yields weighed on dividend-oriented shares and increased attention to the cost of funding large capital programs. AI-related power demand remains a meaningful long-term opportunity, but investors are asking how quickly projects will produce returns and how much financing they require.
NOTE: Index figures are weekly price returns. Sector figures are the price returns of the 11 Select Sector SPDR ETFs, calculated from their September 18 and September 25 closing prices and rounded to one decimal place. They exclude distributions and may differ from dividend-adjusted ETF returns or the corresponding S&P 500 sector index returns.
Figure 9: Sector Relative Strength vs. S&P 500
Source: Stock Analysis/S&P Global Market Intelligence, daily adjusted ETF closes. Relative indexes and moving averages: ARAX calculations.
Adjusted closes include distributions. Trend compares the latest relative index with its 5- and 20-session averages. Past performance does not guarantee future results.
Market breadth has deteriorated sharply since midyear, even as the S&P 500 remains near its highs. Technology and Health Care are the only sectors with a majority of constituents above both their 50-day and 200-day moving averages. Energy continues to show longer-term support, but its short-term breadth has weakened, supporting our neutral outlook. Eight other sectors have fewer than half their stocks above either average. The weakest readings appear in Utilities, Real Estate, and Financials, leaving the index increasingly dependent on a small group of leaders.
Figure 10: Breadth has narrowed. We’re monitoring our suite of indicators for confirmation that this is the beginning of corrective activity or a shorter-term pause.
Reading the chart: “The teal line shows the share above the 50-day average; blue shows the share above the 200-day average. Dashed segments join the reference chart to Friday’s close.”
Source: Supplied chart through Sep 18 (curves traced approximately); Barchart sector moving-average table for Sept 25 endpoints. Percentage rounded by Barchart.
Current constituents may differ from historical membership. Historical traced lines are illustrative. Friday endpoints are source-reported. For informational use.
Equity exposure in a 10% volatility-target strategy (our proxy for vol-targeting funds) has risen to roughly one standard deviation above its five-year average. That suggests systematic investors have added stocks as market volatility has allowed larger positions. The reading is elevated, though well below the chart’s most extreme levels. Continued calm could support demand, while a volatility spike could force these strategies to reduce exposure.
Figure 11: Vol-targeting funds’ exposure now over +1 SD. Another yellow flag (caution).
DBMF’s S&P 500 exposure has climbed to 39.48% as the index advanced. That dovetails with the previous chart: a 10% volatility-target strategy’s equity allocation is also about one standard deviation above its five-year average. Together, they suggest systematic strategies are participating in the rally and helping support demand. The strategies respond to different signals, however. A reversal in the equity trend or a spike in volatility could prompt both to reduce exposure, adding pressure to a pullback.
Figure 12: Positioning indicators remain mixed, but the overall message remains “high neutral.”
Earnings expectations support stocks. Over the past 63 trading days, the S&P 500’s forward earnings estimate rose 8.6%, a reading in the 97th percentile of its history. All 11 sectors show positive revisions, led by Technology at 14.4%, although Materials barely improved and several sectors have cooled from earlier peaks. This contrasts with the weak market breadth in the preceding charts: analysts see improving profits across sectors, but investors are rewarding a much narrower group of stocks.
Figure 13: Earnings continue to support equities.
The S&P 500 has outpaced its historical cycle composite in 2026. Seasonal patterns suggest consolidation or weakness through October, followed by renewed gains into 2027. Cycles remain supportive, but this year’s returns are front-loaded.
Figure 14: Updated S&P 500 cycle composite for 2026 and 2027.
Turning to fixed income, the Fixed Income Focus Scorecard stands at 3.17 out of 10, signaling a difficult backdrop despite attractive income. Income scores 8, and employment supports borrowers, but restrictive Fed policy, above-target inflation, heavy Treasury supply, and weak high-yield momentum weigh on the total. Rising yields offer more income on new bonds while reducing the value of existing ones, especially longer maturities. The 10-year Treasury finished Friday at 5.17%, up from 5.01% a week earlier; the 30-year reached 5.49%. Higher rates also increase refinancing costs and can pressure credit quality. Shorter, higher-quality bonds offer a measured way to capture income.
Figure 15: Higher rates are a clear headwind.
Treasury yields have climbed sharply from their pandemic lows, with the 10-year at 5.17% and 30-year at 5.49%. Mortgage rates remain near 7%.
Figure 16: A visual of the rise in rates.
The entire Treasury curve has shifted higher.
Figure 17: Selected Treasury and Mortgage rates.
Source: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, Sep. 25, Aug. 25, 2026, and Sep. 25, 2025.
U.S. Economic Releases:
Last week’s data pointed to strong activity alongside persistent inflation concerns. September’s flash surveys showed faster growth in manufacturing and services, while initial jobless claims remained low at 197,000. August new-home sales reached a 684,000 annual rate, though durable-goods orders were flat. The tension is in households’ outlook: consumer sentiment fell to 48.1, and expected inflation over the next year rose to 4.6%. That last figure measures expectations, rather than inflation already recorded.
The two releases to watch most closely this week are Wednesday’s PCE inflation report and Friday’s employment report. Together, they could determine whether the recent rise in Treasury yields continues.
Figure 18: Economic release calendar. Source: Forexfactory.com
More midterm data: Midterm years have historically been uneven for stocks. From 1931 through 2025, the S&P 500 averaged a 4.7% calendar-year price gain in midterm years, versus 9.6% in other years. The average midterm path was weakest around September. The picture improved after voting: the chart shows an average 14.8% price gain in the 12 months following Election Day since 1950. These are historical averages, not a forecast. Economic conditions, earnings, and interest rates still shape each cycle.
Figure 19: Whether a midterm year or not, equities have tended to find a bottom during the September/October period.
Bottom Line: Markets enter the week with a striking split between strong earnings and weak participation. The Catastrophic Stop Model improved to 59.09%, supporting benchmark-level equity exposure, and forward earnings revisions remain unusually strong. Yet only 27.81% of Russell 3000 stocks are above their 50-day averages, the median S&P 500 constituent is 16% below its high, and high-yield breadth is weak. Pessimistic sentiment could support a rebound, while elevated systematic equity exposure could amplify a volatility shock. Cash credit spreads remain tight, suggesting caution rather than systemic stress. Bonds face a different tension. Higher yields provide attractive income, but the 10-year Treasury at 5.17%, inflation, and heavy issuance pressure bond prices and refinancing. The equity and fixed-income scorecards stand at 3.75 and 3.17, respectively. This week’s PCE inflation and employment reports will test whether growth can remain healthy without pushing yields higher. Historical post-midterm gains offer context, not a forecast.
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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 model histories; they should be considered hypothetical. All Rights Reserved. © Copyright 2026 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
Disclosure: The information contained herein is provided for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. The securities, instruments, or strategies described may not be suitable for all investors, and their value and income may fluctuate. Past performance is not indicative of future results, and there is no guarantee that any investment strategy will achieve its objectives, generate profits, or avoid losses. Investing involves risks, including loss of principal.
This material is intended to provide general market commentary and should not be relied upon as individualized investment advice. Investors should consult with their financial professional before making any investment decisions based on this information.
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Definitions
S&P 500 Index—An unmanaged composite of 500 large-cap companies, 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. Professional investors widely use this index as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Russell 3000: The Russell 3000 Index measures the performance of approximately 3,000 of the largest U.S. publicly traded companies, representing about 98% of the investable U.S. equity market.
AAII Sentiment Survey — A weekly survey measuring whether individual investors expect stocks to rise, fall, or remain unchanged over the next six months.
Backwardation — A futures-market structure in which near-term commodity prices exceed longer-dated prices, often indicating tight current supplies.
Benchmark Equity Allocation — The normal percentage of a portfolio assigned to stocks based on its investment objective and risk profile.
Breadth — The degree to which market gains or losses are shared across individual stocks. Broad participation generally strengthens a market trend.
Bull-Bear Spread — The percentage of bullish investors minus the percentage of bearish investors.
Catastrophic Stop Model — Day Hagan’s risk-management model designed to identify periods when major market deterioration may warrant reducing equity exposure.
CDS, or Credit Default Swap — A market-based measure of the perceived risk that a borrower will default. Rising CDS costs generally indicate increasing credit concern.
Contrarian Buy Signal — A signal suggesting widespread pessimism may have become excessive, potentially creating a buying opportunity.
Contrarian Sell Signal — A warning that optimism, risk-taking, or positioning may have become excessive, increasing vulnerability to disappointment.
Daily Market Sentiment Composite — Day Hagan’s 0–100 measure combining multiple indicators of investor psychology. Readings below 30 indicate excessive pessimism, while readings above 70 indicate excessive optimism.
DBMF — The iMGP DBi Managed Futures Strategy ETF, used here as a proxy for positioning among systematic, trend-following strategies.
Drawdown — The percentage decline from an investment’s previous peak to its subsequent low.
Earnings Revisions — Changes analysts make to company profit estimates. Rising estimates are generally supportive of stock prices.
Federal Funds Rate — The Federal Reserve’s primary short-term policy interest rate.
FOMC — The Federal Open Market Committee, the Federal Reserve group responsible for setting monetary policy and interest rates.
Forward Earnings — Analysts’ estimates of company profits over a future period, commonly the next 12 months.
Forward Earnings Growth Rate — The expected percentage increase in future corporate earnings compared with the prior comparable period.
Forward P/E Ratio — A stock’s price divided by expected earnings over the next 12 months. Higher readings generally indicate more demanding valuations.
Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
Maximum Drawdown — The largest peak-to-trough decline experienced during a specified period.
OAS, or Option-Adjusted Spread — The additional yield a bond provides over a comparable Treasury after adjusting for embedded options. Wider spreads generally indicate greater perceived credit risk.
Overbought — A condition in which prices have risen rapidly and may be vulnerable to a pause or pullback.
Oversold — A condition in which prices have fallen rapidly and may be positioned for a rebound.
PEG Ratio — The price-to-earnings ratio divided by expected long-term earnings growth. A lower ratio may indicate a more attractive valuation relative to anticipated growth.
Risk-Off Signal — An indication that market conditions have deteriorated enough to favor reducing exposure to riskier assets.
RSI, or Relative Strength Index — A momentum indicator ranging from 0 to 100. Readings above 70 commonly indicate overbought conditions, while readings below 30 indicate oversold conditions.
Systematic Investors — Strategies that adjust exposure using predefined rules based on trends, volatility, momentum, or other quantitative signals.
VIX — A market-based measure of expected S&P 500 volatility over the next 30 days, sometimes called the market’s fear gauge.
Volatility-Targeting Strategy — A rules-based strategy that generally reduces equity exposure when volatility rises and increases exposure when volatility falls.
WTI — West Texas Intermediate, a major U.S. crude-oil pricing benchmark.
WTI Forward Curve — The series of prices for WTI crude-oil futures across different expiration dates, reflecting supply, demand, storage, and market expectations.
Communication Services sector: The Communication Services Sector includes telecom and media & entertainment companies, including producers of interactive gaming products and companies engaged in content and information creation or distribution through proprietary platforms.
Consumer Discretionary sector: The Consumer Discretionary sector's manufacturing segment includes automobiles & components, household durable goods, leisure products, and textiles & apparel. The services segment includes hotels, restaurants, and other leisure facilities. It also includes distributors and retailers of consumer discretionary products.
Consumer Staples sector: The Consumer Staples sector includes manufacturers and distributors of food, beverages, and tobacco, as well as producers of non-durable household goods and personal products. It also includes distributors and retailers of consumer staples, including food & drug retailers.
Energy sector: The Energy sector includes companies that operate in exploration & production, refining & marketing, and storage & transportation of oil & gas, as well as coal & consumable fuels. It also includes companies that offer oil & gas equipment and services.
Financials sector: The Financials sector encompasses banking, financial services, consumer finance, capital markets, and insurance. It also includes Financial Exchanges & Data and Mortgage REITs.
Fixed Income sector: The Fixed Income sector includes investment securities that pay investors fixed interest payments until maturity. Designed for income generation and capital preservation, this sector includes government, corporate, and municipal bonds, as well as certificates of deposit (CDs).
Health Care sector: The Health Care sector includes health care providers & services, health care equipment & supplies, and health care technology companies. It also includes companies involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.
Industrials sector: The Industrials sector includes aerospace & defense, building products, electrical equipment, machinery, and companies that offer construction & engineering services. It also includes providers of commercial & professional services, including printing, environmental & facilities services, office services & supplies, security & alarm services, human resources & employment services, and research & consulting services. It also includes companies that provide transportation services.
Information Technology sector: The Information Technology sector includes software and information technology services, manufacturers and distributors of technology hardware & equipment, such as communications equipment, cellular phones, computers & peripherals, electronic equipment and related instruments, and semiconductors and related equipment & materials.
Materials sector: The Materials sector includes chemicals, construction materials, forest products, glass, paper and related packaging products, and metals, minerals, and mining companies, including steel producers.
Real Estate sector: The Real Estate sector includes companies engaged in real estate development and operation. It also includes companies offering real estate-related services and Equity Real Estate Investment Trusts (REITs).
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