Day Hagan Catastrophic Stop Update September 9, 2025
A downloadable PDF copy of the Article:
The DH Catastrophic Stop model level is 50%, indicating that investors should maintain their benchmark equity exposure.
Our models and indicators suggest an overall neutral outlook. Historically, equities have typically appreciated during such neutral periods in our models. As a result, while we 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%.
Investor sentiment remains at the higher end of the neutral range. A decline below 30, followed by a reversal back above, would likely be a good setup for a year-end rally.
Figure 2: Sentiment continues to reverse from the recent peak in excessive optimism.
OBOS conditions somewhat mirror the sentiment backdrop; high-neutral.
Figure 3: RSI levels are at the high end of the neutral range on a 21-day basis.
Breadth and participation are also neutral based on the percentage of S&P 500 stocks above their 50- and 200-day moving averages, as well as net new highs (not shown).
Figure 4: Breadth and participation indicators are largely neutral.
Interesting look at volatility below. Note the increased volatility expectations heading into the PPI and CPI prints, followed by a reversal back to lower levels. Indicates that investors are preparing for volatility. This is good in that it shows markets pricing in some potential bad news. What we don’t want to see is complacency and a negative surprise.
Figure 5: Implied vol above Historic vol is, in our view, appropriate given the news flow over the next couple of days.
Gamma condition update: Gamma flips to negative below SPX 6,439. Above that level, the current aggregate option positioning will mute vol. Below that level, vol is expected to increase quickly. (Data changes daily. Around expirations, it changes significantly.)
Figure 6: Look for vol to increase quickly below 6,439.
Two-edged sword: Lower rates are positive for the equity market but also indicate that investors may be pricing in potential economic weakness. We view economic activity as slightly below trend, but positive. We’re watching to see if the lower rates translate into lower mortgage rates and renewed purchase activity.
Figure 7: Are the 2-year and 5-year rates going to break below support? We’re watching closely.
Credit spreads remain tight. Apparently, fixed-income investors are less concerned about an economic fallout.
Figure 8: Investment Grade and High Yield Corporate Bond spreads at the low end of the 5-year range.
For credit spreads, we like the High Yield OAS MACD for one of our guideposts on whether spreads are “biting.” So far, the indicator remains on a buy signal for equities. Note that it is designed to stay on the right side of the prevailing trend.
Figure 9: High-Yield OAS MACD indicator remains on a buy signal.
Better international markets are typically good for U.S. markets (as long as asset flows don’t shift dramatically). The chart below illustrates the terrific YTD gains registered by most international markets this year.
Figure 10: A rising tide often lifts all boats.
Most major currencies have made gains against the U.S. dollar. This is bullish for U.S. businesses with large international exposure.
Figure 11: Foreign currency gains have supported international investments (from a U.S. perspective).
Earnings revision breadth is still constructive for equities. Probably the most important chart of the bunch… Maybe a tie with the rates chart.
Figure 12: S&P 500 3-month earnings breadth is bullish.
Upcoming Reports We’ll be Watching Closely
PPI and CPI are huge. If they hit the forecasts, markets move higher. If they come in below the forecasts, folks are likely to start pricing in a 50 bps cut next week, and markets should do really well.
The 10- and 30-year auctions will also be followed closely, given the lower rates since the last auctions.
Lastly, the Consumer Credit beat and better NFIB results are encouraging.
Figure 13: Calendar of Economic Releases
Amid ongoing concerns around inflation, employment, and geopolitical risks, we highlight the following broad observations about Big Bear Markets—those that are both deep and prolonged. Historically, such markets have typically been triggered by one or more of the following major factors:
Recessions (economic weakness)
Commodity spikes (oil prices)
Aggressive Fed
Extreme valuations
At this point, we don’t forecast a commodity (oil) spike or the Fed turning aggressive; in fact, quite the opposite. Valuations are expensive, but with earnings forecasts ratcheting higher, there is a slight offset. (This is why we focus heavily on earnings revision trends.)
While we recognize signs of economic softness and acknowledge the rising probability of a recession, we do not view these risks as immediate or overwhelming at this stage. Our outlook is informed by a set of key “recession indicators,” outlined below, which we monitor closely. Should these signals deteriorate further, we are prepared to shift to a much more defensive posture quickly.
Labor Market Recession Metrics
Sahm Rule: 3-month average jobless (unemployment) rate 0.5 percentage points above the 12-month low. No recession signal.
Nonfarm Payrolls: 3-month net decline. No recession signal.
Initial Jobless Claims: Above 400k. No recession signal.
Temporary Help Employment: Often turns about 6-12 months before broader payrolls. The most recent peak was in March 2022. Signals a recession, but since the peak was over 2 ½ years ago, we rate this neutral.
Average Weekly Hours (manufacturing): Firms cut hours before heads. First break below the prior 12-month low. Close to a recession signal.
Job Openings vs. Unemployment (Beveridge curve vs. JOLTS): Sharp drops in openings relative to job seekers are early warning signs. Also, JOLTS openings are down more than 20% from the 12-month peak. Job Openings are currently down -4.3% from a year ago. No recession signal.
LEI: Since 1960, has tended to turn down 6- to 12-months before recessions. Need to see a persistent downturn of at least six months (some false signals in the 1960s and 1980s). Includes Weekly Hours and initial claims. No recession signal.
ISM Manufacturing PMI (New Orders): Sustained readings below 50. Recently jumped to 51.4% in August, following six readings below 50 (Feb–July). Rated neutral given the recent improvements. Services PMIs are very strong for the U.S. and most of the world.
Credit Spreads: Shorter-term measure. More of a confirmation signal. No recession signal.
Housing Market Indicators: Permits and Starts typically weaken 6 to 18 months before a recession. Permits peaked in January 2022. Signals a recession, but it can be very early.
Profit Margin Compression: Typically occurs 1 to 2 years before recessions. No recession signal.
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. We will closely monitor overbought and oversold conditions to identify potential reversals before issuing new risk-on alerts. 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 25 bps rate cut odds over 90%, 50 bps is around 11%). All eyes will be on tomorrow’s PPI and Thursday’s CPI prints.
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.
OBOS Indicators – Overbought/Oversold (OBOS) index relates the difference between today’s closing price and the period’s low closing price with the trade margin of the given period.
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.
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.
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.
NFIB – The National Federation of Independent Business advocates on behalf of America’s small and independent business owners.
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
© 2025 Day Hagan Asset Management
