Day Hagan Catastrophic Stop Update September 8, 2024
A downloadable PDF copy of the Article:
Catastrophic Stop Update
The Catastrophic Stop Weekly Update is being sent out early due to travel on Monday. The data reflects Thursday’s closing prices.
The Catastrophic Stop model currently sits at 55.7%. The Internal and External composites are neutral.
Figure 1: The Catastrophic Stop model’s indicators remain near neutral levels (a decline below 40% for two consecutive days generates a sell signal). This sets the model up to respond to the next major trend.
It's worth noting that despite the market's weakness last week, on 9-3-2024, the 21-day moving average surpassed the 63-day moving average, triggering a short-term buy signal. This signal will likely be reversed unless the market quickly reaches new highs.
Figure 2: The Short-term Trend Factor registered a buy signal last week. However, it is poised to reverse back to a sell signal should market weakness continue.
Given that the S&P500 is down just 4.6% from the all-time high (through Friday’s close), most sentiment and oversold readings are relatively mild. For example, the Daily Sentiment Composite is neutral.
Figure 3: Short-term sentiment measures are not yet signaling excessive pessimism. A move below 41.5% would shift the composite to a positive stance.
Figure 4: On a very short-term basis, looking at the number of stocks trading above their 10-day moving averages, we note that a decline below 7.7% has often identified oversold conditions. Subsequently, a reversal back above the 7.7% level has provided useful buy signals. The indicator (bottom clip of the chart) is nearing levels seen on August 5th. (This indicator is similar to the Zweig Thrust Indicator’s message.)
Figure 5: Longer-term measures of trend and breadth are still neutral overall. For example, the McClellan Summation Index isn’t currently showing either a breadth thrust or intense oversold conditions being in place. Moreover, the indicator has been drifting higher. In other words, the longer-term trend is intact--so far.
Figure 6: Of the MSCI All Country World Index constituents, 53% are above their 200-day moving averages, while 67.3% are sporting rising 200-day moving averages. This has historically supported global equity prices. (Note: 41 of 47 ACWI stock markets show rising 200-day moving averages.)
Figure 7: Options spreads remaining relatively narrow indicates that investors are not panicking. It would be concerning if the four series below began to move above their respective long-term means.
Figure 8: Economic indicators calling U.S. activity continue to miss expectations, on average, but there has been some recent improvement. In our view, this indicator needs to reverse above the lower bracket for a significant new leg higher to develop. In Powell’s remarks at Jackson Hole, he noted that the labor market had clearly slowed, and the current policy rate level provides ample room to respond to greater-than-expected labor market weakness if needed. This seemed to confirm that rate cuts are on the table, with the first likely happening on September 18th. Whether it is a 25 or 50-bps reduction is a toss-up (currently, there is a 70% chance of 25 and 30% for a 50-bps reduction).
Figure 9: The Global Recession Probability model has vaulted above the important 30 level, which is concerning. Historically, when the indicator has been between 30 and 70, there’s a 57.28% probability that a global slowdown (as defined by the OECD) is in effect.
Figure 10: The NDR Economic Timing Model’s message has shifted from “Moderate Growth” to “Slow Growth”. This is consistent with the Global Recession Probability Model. The change is primarily due to weaker housing statistics and manufacturing PMIs.
Figure 11: Nonetheless, history shows that even during slow growth environments, equities have trended higher over time—note the equity returns for the “Growth Stable, Inflation Neutral” environment. Based on the returns observed during periods of “Growth Weak,” you can also see why we are focused on the economic backdrop.
Figure 12a: Seasonality is also getting a lot of airtime. Historically speaking, we are clearly in a weaker period for both the S&P 500 and NASDAQ (charts above).
Figure 12b: Seasonality is also getting a lot of airtime. Historically speaking, we are clearly in a weaker period for both the S&P 500 and NASDAQ (charts above).
Figure 13: Yet, the Leading Indicator Model, a composite of 10 indicators that “end to lead the market at major turning points,” is currently bullish.
All in all, the weight of the evidence is neutral. As for our sector allocations, during our rebalance at the beginning of this month, the models shifted more defensively, with Health Care, Consumer Staples, and Utilities all increasing and Information Technology retreating.
Bottom Line: The sector modeling was the first part of our risk management program to shift to more defensive positioning, effectively reducing the overall portfolio's beta. The second part of our approach to risk management would be an increase in cash, which is currently not yet supported by the weight of the evidence. However, the recent market weakness has caused the first round of short-term indicators to correctly flip negative. If the intermediate-term indicators follow suit, causing the Catastrophic Stop model to turn negative, we will reduce risk in the portfolio by increasing our cash allocation.
As we’ve discussed over the past many weeks, the quantitative, unemotional outlook confirms that economic growth is decelerating but still positive overall. However, the economic growth story is clearly under more pressure. The good news is that, from our vantage point, inflation pressures continue to diminish.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. Currently, the long-term uptrend remains intact. 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: Above is the current Fed Funds Futures Curve (dark blue line) to give you an idea of what’s currently priced in the market. Interestingly, rate cut expectations are now for more cuts than what was expected six months (orange) and one year ago (light blue).
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 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.
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.
Short-Term Trend – A market’s movement sustained over a relatively short period of time.
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.
McClellan Summation Index – Is a long-term version of the McClellan Oscillator, which is a market breadth indicator based on stock advances and declines. Interpretation is similar to that of the McClellan Oscillator, except that is more suited to intermediate to major trends and related reversals. It can be calculated as the sum of all the daily values of the McClellan Oscillator.
MSCI All Country World Index (ACWI) – Is a stock index designed to track broad global equity-market performance. The index comprises the stocks of nearly 3,000 companies from 23 developed countries and 24 emerging markets as of December 29, 2023. Fund managers use the MSCI ACWI as a guide for asset allocation and a benchmark for the performance of global equity funds. The index is also used as the basis for creating investment products such as exchange-traded funds (ETFs).
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
© 2024 Day Hagan Asset Management
