Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop Strategy Update May 2024
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Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop Strategy Update May 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) deteriorated during the month but entered May with a fully invested equity allocation recommendation.
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. However, two external measures deteriorated. High-yield and Emerging Market bond breadth weakened to neutral, while the Baltic Dry Index (a measure of global trade) flashed bearish during the month (Figure 2). For now, the weight-of-the-evidence recommends a fully invested allocation to equity sectors according to the model.
Figure 2: Weakening Baltic Dry Index is Bearish for Equity Exposure
U.S. Market Update
After a strong start to the year, the S&P 500 Total Return Index had a small correction in April, dropping about 4%. Breadth deteriorated sharply—10 of the 11 S&P 500 sectors posted negative returns for the month. Utilities was the standout with a 1.66% gain.
Since last fall, investors had been enjoying a period of historically low downside volatility. The S&P 500 Index had not endured a 3% correction since 10/27/2023, the longest stretch since the 308-day streak ending on 1/26/2018. Almost on cue, the S&P 500 dipped more than 3% by mid-April, ending the streak at 105 trading days (Figure 3). Stronger-than-expected jobs, manufacturing, CPI, and retail sales data suggest that inflation is sticky enough and economic growth is solid enough for the Fed to wait for more evidence before cutting its target rate. Both the two-year and 10-year Treasury yields hit five-month highs.
However, economic strength, earnings growth, and long-term momentum support the case for the long-term uptrend in equities to remain intact.
The sector model maintained mixed leadership this month. Entering May, Financials, Industrials, Consumer Staples, and Utilities are above benchmark weight. Energy, Real Estate, and Information Technology are neutral. Materials, Consumer Discretionary, Health Care, and Communication Services are below benchmark weight.
Figure 3: S&P 500: Number of Days Before the Start of 3% Corrections
Financials’ allocation remained well above benchmark weight. On a fundamental basis, a strengthening U.S. Dollar Index, business credit conditions, and Financials’ investment grade option-adjusted spreads remained bullish for the sector. However, during the month, weakening economic surprises (Figure 4) joined bearish signals from bank loan growth and the 10-2 yield curve. Technicals are positive—four of the six measures remained on bullish signals including sector momentum, trend, volatility, and relative drawdown.
Figure 4: Weakening Economic Surprises is Bearish for the S&P 500 Financials Sector
The Utilities sector’s allocation is also above benchmark weight. On a fundamental basis, indicators are mixed—bullish signals from relative earnings yield, manufacturing PMI, and yields on Utilities investment grade bonds are offset by oil prices, the copper/gold ratio, and capacity utilization. However, all seven price-based measures are now bullish—a trend indicator flashed a bullish signal during the month (Figure 5).
Figure 5: Improving Trend is Bullish for the S&P 500 Utilities Sector
Communication Services’ allocation remained below benchmark weight. On a fundamental basis, the 10-2 yield curve and sales growth trends remained bullish. However, relative valuation, option-adjusted spreads, and internet vs. retail sales trends remained bearish. One positive development occurred during the month—earnings revision breadth (Figure 6) improved to neutral. Technicals are weak—four of the six measures remained bearish for the sector.
Figure 6: Improving Earnings Revision Breadth is Neutral for the S&P 500 Communication Services Sector
The Materials sector’s allocation remained below benchmark weight. On a fundamental basis, indicators lean bullish—during the month, the emerging/developed equity momentum indicator flashed a bullish signal, joining bullish readings from commodity prices (copper, silver, gold, and natural gas). However, technicals lean bearish—four of six measures are negative for the sector including an overbought/oversold indicator that moved bearish during the month (Figure 7).
Figure 7: Reversal in Overbought Relative Strength is Bearish for the S&P 500 Materials Sector
Summary
The sector model maintained mixed leadership this month. Entering May, Financials, Industrials, Consumer Staples, and Utilities are above benchmark weight. Energy, Real Estate, and Information Technology are neutral. Materials, Consumer Discretionary, Health Care, and Communication Services are below benchmark weight.
The sector model uses sector-specific indicators to identify opportunities and risks in an objective, weight-of-the-evidence approach.
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
1000 S. Tamiami Trl
Sarasota, FL 34236
Toll Free: (800) 594-7930
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.
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© 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.
