Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop Strategy Update January 2024
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Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop Strategy Update January 2024 (pdf)
Catastrophic Stop Update
The NDR Catastrophic Stop Sell model combines time-tested, objective indicators designed to identify high risk periods for the equity market. The model (chart right) remained steady during the month and entered January with a fully invested equity allocation recommendation.
Figure 1: Smart Sector® Catastrophic Stop Sell Model
Figure 2: Rising Relative Strength is Bullish for Equity Exposure
The bullish reading from the model is driven by strong externals and internals. Five of the seven price-based measures remain bullish, including relative strength (chart left). With a strong market rally off the October lows, investor sentiment remains excessively optimistic, so we will keep an eye on this measure. For now, the weight of the evidence recommends a fully invested allocation to equity sectors according to the model.
U.S. Market Update
The S&P 500 Total Return Index finished 2023 with a bang, gaining about 4.5% and pushing the yearly return to about 26%! Breadth remained strong, with 10 of 11 S&P 500 sectors posting positive price gains for the month—only Energy was down modestly.
The 10-year Treasury yield continued to decline and helped drive strong returns from Real Estate, Industrials, Consumer Discretionary, and Financials. The 10-year Treasury yield, which had risen above 5% in October, dropped to less than 4% last month. Ten-year Treasury yields have always fallen in the 2-3 months before the first rate cut going back to 1970. The market is expecting a rate cut in March. Historically, after first rate cuts, yields tend to stabilize.
The S&P 500 has never rallied more than 11% in the three months leading up to the first Fed rate cut. On average, performance has been pretty flat.
But after the rate cut, stocks tend to rally for 6-7 months with a mean gain of roughly 12% (chart below).
Entering January, the sector model is overweight Energy, Real Estate, Utilities, and Consumer Discretionary. Materials and Financials are underweight. Information Technology, Communication Services, Consumer Staples, and Health Care are market weight.
Figure 3: S&P 500 Around First Fed Rate Cuts
Consumer Discretionary is an overweight position. On a fundamental basis, valuation, consumer credit conditions, and housing starts remained bullish, while long-term rates, discretionary spending, and weak earnings surprises remained headwinds for the sector. All six price-based measures remained bullish during the month, including short-term trend (chart right).
Figure 4: S&P 500 Consumer Discretionary Sector's Short-Term Trend is Bullish
Figure 5: Improving Breadth is Bullish for the S&P 500 Information Technology Sector
The Information Technology sector’s allocation remains neutral. On a fundamental basis, while valuation, inflation expectations, and short interest remain headwinds for the sector, earnings revision breadth and Emerging Asia equity performance are bullish. Technicals are confirming, as an overbought/oversold indicator moved from bearish to neutral during the month. And four of the five internal (price-based) indicators remain bullish, including improving breadth (chart left).
Communication Services’ allocation dropped sharply and was downgraded from overweight to neutral. On a fundamental basis, indicators are mixed. The yield curve, sales growth trends, and earnings revision breadth remain bullish. However, widening option-adjusted spreads moved bearish for the sector during the month (chart right). This was confirmed by two price-based indicators moving from bullish to bearish.
Figure 6: Widening Spreads is Bearish for the S&P 500 Communication Services Sector
Figure 7: Weakening Median Earnings Yield is Bearish for the S&P 500 Materials Sector
The Materials sector’s allocation dropped and was downgraded to underweight. Price-based measures are mixed. On a fundamental basis, five of the eight indicators are now bearish—earnings yield (chart left) and emerging vs. developed equity momentum moved negative for the sector during the month.
Summary
The sector model remained with a cyclical bias during the month, but there were several changes. Entering January, the sector model is overweight Energy, Real Estate, Utilities, and Consumer Discretionary. Materials and Financials are underweight. Information Technology, Communication Services, Consumer Staples, and Health Care are market weight.
The sector model uses sector-specific indicators to determine opportunities and identify risks in an objective, weight-of-the-evidence approach.
NDR Strategists contributing to this publication: Brian Sanborn, CFA, Ed Clissold, CFA, Rob Anderson, CFA, Thanh Nguyen, CFA, Tim Hayes, CMT, Joe Kalish
We welcome the opportunity to provide more color on what we are seeing and answer your questions. Please email or call us anytime to set up a webinar or discuss the strategy and portfolio.
For more information, please contact:
Day Hagan Asset Management
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Office Phone: (941) 330-1702
Day Hagan/Ned Davis Research
Smart Sector® With Catastrophic Stop ETF
Symbol: SSUS
Strategy Description
The Smart Sector® with Catastrophic Stop strategy combines two Ned Davis Research quantitative investment strategies: The NDR Sector Allocation and the NDR Catastrophic Stop.
The Process Is Based On The Weight Of The Evidence
The fund begins by overweighting and underweighting the S&P 500 sectors based on Ned Davis Research’s proprietary sector models.
Each of the sector models utilize sector-specific, weight-of-the-evidence composites of fundamental, economic, technical, and behavioral indicators to determine each sector’s probability of outperforming the S&P 500.
Sectors are weighted relative to benchmark weightings.
When Market Risks Become Extraordinarily High - Reduce Your Portfolio Risk
The model remains fully invested unless the Ned Davis Research Catastrophic Sell Stop (CSS) model is triggered, whereupon the equity-invested position may be trimmed by up to 50%..
The NDR Catastrophic Sell Stop model combines time-tested, objective indicators designed to identify periods of high risk for the broad U.S. equity market. The model uses price-based, breadth, deviation from trend, fundamental, economic, interest rate, behavioral and volatility-based indicator composites.
When Market Risks Return To Normal — Put Your Money Back To Work
When the NDR CSS model moves back to bullish levels, indicating lower risk, the strategy will reverse toward being fully invested.
Ned Davis Research Disclaimers
The data and analysis contained within are provided "as is" and without warranty of any kind, either express or implied. The information is based on data believed to be reliable, but it is not guaranteed. NDR DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. All performance measures do not reflect tax consequences, execution, commissions, and other trading costs, and as such investors should consult their tax advisors before making investment decisions, as well as realize that the past performance and results of the model are not a guarantee of future results. The Sector Allocation Strategy is not intended to be the primary basis for investment decisions and the usage of the model does not address the suitability of any particular investment for any particular investor.
Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such devices. NDR believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider differing viewpoints and use a weight of the evidence approach that fits their investment needs.
Disclosures
Past performance does not guarantee future results. No current or prospective client should assume future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a portfolio will match or outperform any particular benchmark.
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References to “NDR” throughout refer to Ned Davis Research, Inc. Clients engaging in this strategy will be advised by Day Hagan and will not have a contractual relationship with NDR. Day Hagan purchases signals from NDR, and Day Hagan is responsible for executing transactions on behalf of its clients and has discretion in how to implement the strategy.
NDR is registered as an investment adviser with the Securities and Exchange Commission (SEC). NDR serves as the Signal Provider in connection with this strategy. The information provided here has not been approved or verified by the SEC or by any state or other authority. Additional information about NDR also is available on the SEC's website at https://www.adviserinfo.sec.gov/. This material is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or to participate in any trading strategy. NDR’s strategies, including the model discussed in this publication, are intended to be used only by sophisticated investment professionals.
There may be a potential tax implication with a rebalancing strategy. Rebalancing involves selling some positions and buying others, and this activity results in realized gains and losses for the positions that are sold. The performance calculations do not reflect the impact that paying taxes would have, and for taxable accounts, any taxable gains would reduce the performance on an after-tax basis. This reduction could be material to the overall performance of an actual trading account. NDR does not provide legal, tax or accounting advice. Please consult your tax advisor in connection with this material, before implementing such a strategy, and prior to any withdrawals that you make from your portfolio.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
© 2023 Ned Davis Research, Inc. | © 2023 Day Hagan Asset Management, LLC
© Copyright Ned Davis Research, Inc. All Rights Reserved | These materials are historical and intended to be used only as examples, and do not necessarily reflect current views or advice of NDR or its representatives.
