Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop Strategy Update October 2023
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Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop Strategy Update October 2023 (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) deteriorated from last month but entered October with a fully invested equity allocation recommendation.
Figure 1: Smart Sector® Catastrophic Stop Sell Model
Figure 2: Volume Supply Exceeding Demand: Bearish for Equity Exposure
The model’s overall reading is driven primarily by bullish external influences such as trade, market sentiment, and high-yield spreads. However, price-based measures have weakened during the month—three additional indicators flashed a sell signal including supply vs. demand (chart left). For now, the weight-of-the-evidence recommends a fully invested allocation to equity sectors according to the model.
U.S. Market Update
For the second month in a row, the S&P 500 declined in September, dropping 4.8%. Breadth remained weak—10 of the 11 S&P 500 sectors posted negative returns for the month—Energy was the only sector with positive gains (chart below). Sectors inversely correlated to a rising 10-year yield—Real Estate, Tech, Consumer Discretionary, and Utilities—underperformed the most.
The S&P 500 Index has fallen below previous support at the August 2022 highs. On the one hand, the pullback is coming during a seasonally weak time of the year, suggesting that the stage is being set for a year-end rally. On the other hand, the breakdown coincided with a breakout in bond yields across the Treasury curve. Investors may be belatedly taking the Fed’s higher-for-longer rhetoric seriously just as economic data slows, arguing for more than a seasonal pause.
In reviewing our indicators, we came to three conclusions. First, technical damage has triggered negative signals from some trend and breadth indicators. Second, sentiment is approaching extremely pessimistic levels, suggesting that a year-end rally is not off the table. Third, macro conditions and long-term technicals leave open the possibility that the market is going through a topping process that could carry into 2024.
The sector model remained with a mix of cyclical and defensive leadership during the month. Entering October, the sector models are overweight Communication Services, Health Care, and Utilities. Energy, Information Technology, and Materials remained marketweight. Industrials joined Consumer Discretionary, Consumer Staples, Financials, and Real Estate at underweight.
Figure 3: S&P500 GICS Sector Monthly Performance (08/31/2023 - 09/30/2023)
The Utilities sector’s allocation remains overweight. While the copper/gold ratio and manufacturing PMI are headwinds for the sector, rising oil prices, capacity utilization, valuation, and yields on investment grade utilities are bullish. Five of the seven internal (price-based) indicators are bullish—most recently, short-term breadth improved to a bullish level (chart right).
Figure 4: Improving Relative Breadth is Bullish for the S&P 500 Utilities Sector
Figure 5: Strong Relative Price Momentum is Bullish for S&P 500 Communication Services
The Communication Services sector’s allocation increased in September and is overweight. Among the “Elite Eight” stocks in the S&P 500, Alphabet has performed the best. The sector’s Telecom-and Media-related companies have also performed better in Q3 after lagging the S&P 500 during the first half of the year. While the 10-2 yield curve remained bearish for the sector, a narrowing option-adjusted spread, valuation, and earnings revision breadth remained bullish. This was confirmed by internal (price-based) indicators, as five of six indicators remain bullish, including strong relative price momentum (chart left).
Industrials’ allocation is slightly underweight. On a fundamental basis, rising commodity prices moved bullish for the sector during the month. However, valuation, oil futures prices, and consumer confidence remain headwinds. This was confirmed by weakening technicals, as now four of the six price-based measures are bearish—sector volatility moved bearish for Industrials during the month (chart right).
Figure 6: Rising Sector Volatility is Bearish for S&P 500 Industrials
Figure 7: Short-Term Overbought/Oversold Measure is
Bearish for the S&P 500 Energy Sector
The Energy sector’s allocation was downgraded to marketweight. On a fundamental basis, indicators are mixed. Crude futures sentiment and worldwide rig count are bullish, but are offset by crude spot prices, supply, and valuation which remain bearish. Technicals are also mixed. With a sharp rise in price over the past month, the Energy sector got short-term overbought, a bearish development (chart left).
Summary
Entering October, the sector models are overweight Communication Services, Health Care, and Utilities. Energy, Information Technology, and Materials remained marketweight. Industrials joined Consumer Discretionary, Consumer Staples, Financials, and Real Estate at underweight. 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 is trimmed 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 immediately moves back to 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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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.
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© 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.
