Day Hagan Catastrophic Stop Update September 30, 2024
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Catastrophic Stop Update
The Catastrophic Stop model is unchanged this week at 65.7%. The Internal Composite is bullish, and the External Composite is neutral.
The model continues to support a fully invested position. With the S&P 500 near all-time highs, the model has correctly maintained a risk-on stance YTD.
Shorter-term sentiment measures continue to portray a neutral message, even with the solid returns over the past month. Near-term, this is a slight positive.
Longer-term sentiment measures extend further into the excessive optimism zone. So far, however, this condition doesn’t appear to have seeped into the market psyche. We’d rather this indicator was below 66 and, ideally, below 57 as a solid set-up for a year-end rally. We’ll see…
We’re expecting another month or so of seasonal volatility. However, come late October, should our models continue to portray an environment of positive global economic growth and a continued reduction in inflationary pressures, we’ll likely be shifting back to more risk-on sectors of the U.S. equity market.
Volume-adjusted Demand continues to outpace Supply. This has historically provided a bullish underpinning. A swing to more Supply would cause us to downshift expectations.
One indicator that currently gives us pause is the High-Low Logic Index. If a large number of companies are making new highs or new lows, then this indicator shows that the market is “in gear.” However, according to this measure, this isn’t currently the case, as the market is clearly out of gear. As Art Huprich, our resident CMT, likes to say, “This is a condition of the market.” It is not necessarily an indicator that would prompt action on its own.
The U.S. Economic Timing Model is back in the “Moderate Growth” zone. However, we are closely watching a couple of other measures of economic activity.
For example, the U.S. Recession Probability model has spiked higher but remains well below the 50% level, which denotes a higher recession probability.
A similar “look” from the Global Recession Probability model. While not yet in the “High Recession Risk” zone, it is heading in that direction. We’re monitoring closely, especially with the recent underwhelming PMI readings (manufacturing PMIs are dragging down overall PMI composites--discussed last week) and recent misses on personal income and spending (m/m). A move above 70 would be concerning.
Earnings are still our main focus. The median expected earnings growth for the next 12 months is +7.9%. This is within the zone that has been in place 70.38% of the time since 1984. In other words, historically, expectations aren’t currently overly rich or underappreciated. We still have concerns about whether earnings will achieve expectations, but at this point, the earnings model is still positive (though declining), and the percentage of positive estimate revisions is supportive.
The earnings model looks like the global recession probability model in that it is heading in a different direction than we would like. If the model drops below 40, it would be a red flag.
Below are the indicators that make up the earnings model. As you can see, estimate revisions, credit spreads, and inflation measures are generally bullish. The rest of the indicators are not. The net reading is mildly bullish (shown in the chart above)—for now.
Bottom Line: Our models remain supportive, with U.S. equities near all-time highs. Several major models are showing initial signs of weakness, which we’ve seen before. However, at this juncture, our models' collective message is that the uptrend is intact.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. As has been the case for all of 2024, the broader-based composite models calling U.S. economic growth, international economic growth, inflation trends, liquidity, and equity demand remain constructive. The Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will raise cash.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk and where to place 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 convenient time.
Additional Chart of Interest
PS: Below is a look at year-end rallies for the DJIA since 1926. It illustrates returns from the November/December lows to the January/February highs. The average return is 11.69% (mean). Our models will determine if the markets are set for an “average” year-end rally or something different. Stay tuned.
I hope you have a wonderful week,
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. Charts courtesy Ned Davis Research (NDR). © Copyright 2024 NDR, Inc. Further distribution is prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
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.
Purchasing Manager Indexes (PMI) – Is a measure of the prevailing direction of economic trends in manufacturing.
High-Low Logic Index – Compares stocks that are reaching their 52-week highs with stocks that are hitting their 52-week lows. The high-low index is used by investors and traders to confirm the prevailing market trend of a broad market index, such as the S&P 500.
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.
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