Day Hagan Catastrophic Stop Update September 29, 2025
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The DH Catastrophic Stop model level is 50%, indicating that investors should maintain their benchmark equity exposure.
No change to our 30,000-foot view: Our models and indicators suggest an overall neutral outlook. Historically, equities have typically appreciated during periods of neutral market conditions. As a result, while we continue to anticipate a likelihood of short-term consolidation, we do not foresee a significant downturn on the near-term horizon.
Was last week’s “pullback” the consolidation we’ve been anticipating (S&P 500 down just -0.31% for the week)? If it were, we would expect sentiment to have shifted more toward pessimism, OBOS indicators to have moved to more oversold levels, volatility measures to have spiked higher (VIX and MOVE), and positioning indicators to have shown significantly lower equity exposure. While there was some movement in these measures, the changes were minimal and barely made a noticeable difference. In other words, there’s still the likelihood of a short-term pullback or continued sideways consolidation.
Figure 1: The Day Hagan Catastrophic Stop model is neutral at 50%.
Sentiment didn’t move toward more pessimistic levels.
Figure 2: The DH Daily Market Sentiment Composite
No significant shift from Overbought to Oversold.
Figure 3: RSI levels for the SPX are more overbought than oversold on a shorter-term horizon. Overbought can stay overbought for a long time.
Volatility measures didn’t buy the move last week as the start of something more significant.
Figure 4: Equity volatility still muted, according to VIX.
Even though bond yields moved higher from 4.01% on 9-11-2025 to 4.20% Friday, the MOVE index isn’t overly worried that this is the start of a renewed bout of volatility. Keep in mind, however, that VIX and MOVE can shift quickly, and when they do, we’ll adjust our outlook accordingly.
Figure 5: The MOVE index is currently constructive for equities.
Positioning indicators are mixed but remain generally elevated.
Figure 6: Historically, market gains are strongest from low levels of positioning. The markets aren’t there yet.
Keep an eye on the “Gamma Flip” zone. A move below 6,582 will shift the gamma condition of the market to negative, potentially increasing volatility on both the downside and the upside. (Data changes quickly.)
Figure 7: Gamma matters short-term. Especially when adjusting portfolio holdings. Use it to your advantage.
Credit spreads remain tight. Very tight. Good and bad. Good = shows fixed income investors not terribly worried about a “big bad event.” Bad = coiled spring.
Figure 8: U.S. Corporate spreads tight.
Figure 9: U.S. High Yield spreads tight. Supported in part by the recent rally in small-cap stocks.
Figure 10: Even Europe's high-yield spreads are tight.
Figure 11: Yes, EM high-yield spreads are at the party.
Below is an updated version of the S&P 500 cycle composite for 2025. Getting closer to the cycle low point as we head into the end of the year. Note: The trend is more important than the level, and these are secondary indicators in our work.
Figure 12: Based on a combination of cycles, the S&P 500 is closing in on a historically strong period. Of course, the buyback blackout period and earnings season will have a great influence.
Below is a table detailing the S&P 500 performance by month since 2010. As you can see, October has generally been a positive month, up 60% of the time.
Note: 2018 was the notable weak spot. Recall that rates were rising, trade tensions with China were expected to impact global supply chains and profits, big tech companies were under pressure (Apple, Amazon, Alphabet), and there were signs of slowing growth in Europe and China. The VIX also spiked, amplifying the sell-off.
Figure 13: A more detailed look at seasonality.
U.S. economic growth is just fine for now. Q2 U.S. real annualized GDP was revised up to 3.8%, and Q3 is looking pretty good, too (chart below). Would you rather have a Fed funds rate cut or a growing economy? Hint: It's all about earnings at this point in the cycle.
Figure 14: U.S. economic growth is OK for now. The flash Manufacturing (52.0) and Services (53.9) PMIs are in expansion territory (expansion when the composite is >50).
The St. Louis Fed Financial Stress Index currently reads −0.5655 (as of September 12, 2025), indicating below-average financial stress. Values below zero reflect calmer conditions, while values above zero signal elevated stress. The index combines 18 weekly data series, including interest rates, yield spreads, and market indicators like the VIX and corporate bond yields.
Figure 15: The index shows financial conditions are still supportive of equities.
With the employment numbers being released on Friday and the clamor around the inaccuracy of the data, we remain focused on the weekly initial unemployment claims. A rise above 350k or so would alert us to a higher probability of economic deterioration.
Figure 16: Weekly initial unemployment claims continue to point to a balanced job market.
I saw this chart and wanted to share it with you. The amount of cash in money market funds is at a record and supports the notion that there is capital for dip-buying. We understand that relative to market cap, it’s not as exciting. To put it simply, we view this as a positive, not a negative, regardless of the adjusted-magnitude argument.
Figure 17: While systematic and algo positioning is elevated, it's important to note that there are still significant pockets of cash on the sidelines.
An S&P Global article from mid-2025 shows that global private equity funds “held nearly $2.515 trillion in dry powder.” Another article reveals that an additional $460 billion was being held in private credit funds as of May.
Figure 18: More cash is actively looking to be deployed.
Yes, we’ll continue to show this chart. And it's still bullish.
Figure 19: Earnings revisions trends remain constructive.
Last week’s economic data was fairly strong: New Home Sales, Final Q2 GDP, Unemployment Claims, Durable Goods, Existing Home Sales, Personal Income, and Personal Spending. Even the PCE Price Index was in line. All of this aligns with our view that U.S. economic activity is stable, and inflation is generally heading in the right direction (although it remains somewhat sticky).
Confirming our view on the economy, the Citigroup Economic Surprise Index spiked higher, indicating that economic releases continue to beat expectations.
This week, we’ll be focused on Tuesday’s JOLTS report, Wednesday’s ADP report, and Manufacturing PMIs, Thursday's initial unemployment claims, Friday’s Services PMIs, and, because we must, Friday’s employment data. We’ll be looking closely at the nonfarm payroll details.
Figure 20: Upcoming economic data.
Conclusion: Our perspective remains 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.
Additional Table of Interest
Figure 21: The table below details S&P 500 performance around government shutdowns. Our view is that investors largely dismiss shutdowns as a short-term issue, and the prevailing trend is expected to continue once shutdown-related volatility subsides. (Source: E.D. Jones)
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.
Relative Strength Index (RSI) - Is an oscillating indicator that is designed to measure a stock's momentum, which is both the speed and size of price changes. Many investors use this indicator to help identify whether a stock is overbought or oversold.
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.
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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