Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop Strategy Update March 2024
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Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop Strategy Update March 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 (Figure 1 below) improved during the month and entered March with a recommendation for fully invested equity allocation.
Figure 1: Smart Sector® Catastrophic Stop Sell Model
The bullish reading from the model is driven by strong internals. Five of the seven price-based measures—including relative strength, trend, and breadth—remain bullish. External measures improved. The short-term trend in global trade—as measured by the Baltic Dry Index—flashed a bullish signal during the month (Figure 2, below), joining bullish readings from option-adjusted spreads and high-yield and emerging market breadth. Investor sentiment remains excessively optimistic, which is bearish for stocks. For now, the weight of the evidence recommends a fully invested allocation to equity sectors according to the model.
Figure 2: Improving Short-Term Trend in the Baltic Dry Index: Bullish for Equity Exposure
U.S. Market Update
The S&P 500 Total Return Index continued its positive momentum into February with a gain of about 5.3%. Breadth improved significantly—all 11 S&P 500 sectors posted positive price gains for the month. Several of the “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla) continued their strong gains, which led to Consumer Discretionary, Communication Services, and Information Technology outperforming the broad market during the month. Other cyclical sectors like Industrials and Materials also outperformed.
A strong start to the year for stocks has tended to foreshadow an incumbent victory in U.S. presidential elections, especially for Democrats. Many factors determine an incumbent’s reelection bid, including perceived policy effectiveness and international events.
When an incumbent Democrat has gone on to win, the DJIA has risen a median of 2.6% in the first two months of the year versus a 6.2% decline when an incumbent Democrat has lost (Figure 3 below).
Leadership has been more defensive in the run-up to presidential elections. However, for now, the sector model remained with a cyclical bias during the month. Entering March, Information Technology and Financials are overweight. Industrials, Health Care, Consumer Discretionary, Consumer Staples, Energy, and Real Estate are neutral. Materials, Communication Services, and Utilities are underweight.
Figure 3: Dow Industrials – Presidential Election Year Cycle II
The Consumer Discretionary sector’s composite model improved on the back of strong February gains from Amazon (+13.9%) and Tesla (7.8%), which helped drive another bullish signal from one of the price-based indicators—deviation from trend (Figure 4, below). However, internals are still mixed, with only three of the six on bullish signals. On a fundamental basis, the weight of the evidence remains positive, with four of the six measures on bullish signals.
Figure 4: Improving Deviation from Trend is Bullish for the S&P 500 Consumer Discretionary Sector
The Industrials sector’s allocation improved sharply, upgrading it to neutral from a significant underweight. On a fundamental basis, indicators remain mixed, including valuation measures. While the U.S. dollar remains a tailwind, commodities and industrial production are neutral, and crude oil futures prices and consumer confidence are bearish. However, internals improved with three more price-based measures flashing bullish signals during the month, including 3-month volatility and two short-term momentum indicators (Figure 5 below).
Figure 5: Improving Short-Term Momentum is Bullish for the S&P 500 Industrials Sector
The Communication Services sector allocation deteriorated sharply, dropping to an underweight from overweight. On a fundamental basis, indicators evaluating the 10-2 yield curve and sales growth trends remained bullish. However, earnings revision breadth flashed a bearish signal (Figure 6, below), joining other negative readings from relative valuation, option-adjusted spreads, and internet vs. retail sales trends. This was confirmed by weakening technicals, with both an overbought/oversold indicator and deviation from trend measure that moved bearish during the month.
Figure 6: Weakening Earnings Revision Breadth is
Bearish for the S&P 500 Communication Services Sector
The Energy sector’s allocation dropped during the month, moving it to neutral from overweight. On a fundamental basis, a strengthening U.S. Dollar Index indicator flashed a bearish signal during the month (Figure 7, below), joining negative signals from crude futures sentiment, valuation, and oil supply measures. Technicals confirmed with three of five measures now negative for the sector, with a 6-month volatility indicator turning bearish during the previous month.
Figure 7: Strengthening U.S. Dollar is Bearish for the S&P 500 Energy Sector
Summary
The sector model remained with a cyclical bias during the month. Entering March, Information Technology and Financials are overweight. Industrials, Health Care, Consumer Discretionary, Consumer Staples, Energy, and Real Estate are neutral. Materials, Communication Services, and Utilities are underweight.
The sector model uses sector-specific indicators to identify opportunities and 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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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.
