Day Hagan Smart Sector® with Catastrophic Stop Strategy Update February 2025
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Day Hagan Smart Sector® with Catastrophic Stop Strategy Update February 2025 (pdf)
Catastrophic Stop Update
The Catastrophic Stop model combines time-tested, objective indicators designed to identify high-risk periods for the equity market. The model (Figure 1) improved in January and entered February with a fully invested equity allocation recommendation. We will raise cash if our models shift to bearish levels (below 40% for two consecutive days).
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return Index
Figure 2: The Global Composite Purchasing Managers’ Index (PMI) remains in expansion territory; however, manufacturing sectors continue to underperform relative to services. According to the OECD’s GDP growth projections, advanced economies are expected to grow at rates of 1.3% in both 2025 and 2026. In contrast, emerging markets are projected to achieve growth rates of 3.2% and 3.3% during the same period. Overall, global GDP is anticipated to increase by 2.9% in 2025 and 2.8% in 2026. This economic landscape provides a favorable environment for international equities.
Sector Commentary
January began with a strong U.S. jobs report, showing an unexpected increase of 256,000 jobs in December, far exceeding the analyst expectations of 160,000 jobs. This data reinforced expectations that the Federal Reserve might maintain or even elevate interest rates longer than previously anticipated, leading to an increase in U.S. Treasury yields. Specifically, the yield on the 10-year U.S. Treasury note rose by 0.17 percentage points for the week ending January 10, highlighting heightened concerns about inflation and reduced likelihood of immediate rate cuts by the Fed.
The global bond market also felt pressure, with UK government bonds (gilts) seeing a sharp sell-off. This pushed the 10-year gilt yield up, marking one of the largest one-week increases in a year. This was partly due to investor worries over the UK’s borrowing needs and the broader implications of global inflationary pressures.
The U.S. dollar’s strength, hitting a two-year high following the robust U.S. labor market data, added another layer of complexity for global stocks, particularly for companies in countries that rely heavily on U.S. markets for revenue. This was evidenced by the euro dropping significantly against the dollar, reaching its lowest level since November 2022. The anticipation of policy shifts, including potential tariffs and changes in immigration policy under President Trump, introduced further uncertainty, contributing to market volatility. Analysts noted a growing disconnect between stock performance and interest rate expectations. U.S. 10-year Treasury yields climbed above 4.5% by late January, suggesting a challenging environment for equities if bond yields were to rise further.
Overall, these factors combined to create a volatile start to the year for global stocks and bonds, with investors recalibrating their expectations amidst strong U.S. economic data, rising global yields, and policy uncertainty.
We are monitoring the following developments:
Concerns Over Chinese AI Developments: There was a notable market reaction to news regarding the competitive threat from China’s advancements in artificial intelligence. Specifically, the Chinese startup DeepSeek released an AI model that appeared to compete effectively with leading U.S. models at a lower cost, causing investors to question the high valuations of U.S. tech stocks, particularly in the AI sector. This led to a significant sell-off in tech stocks like Nvidia, Amazon, and Apple, with Nvidia experiencing its largest intraday drop since a tech rout in August of the previous year. So far, the effect appears relatively muted.
U.S. Economic Sentiment: The University of Michigan’s Consumer Sentiment Index dropped to 71.1 for January, lower than expected and down from December’s 74. This further fuels concerns about an economic slowdown and potentially affects investor confidence.
Global Market Sentiment and Policy Uncertainty: Donald Trump’s return to the White House had initially spurred U.S. stocks to new highs, but investors shifted their focus to the Federal Reserve’s policy meeting, leading to profit-taking and market corrections. The uncertainty around Trump’s pro-business policies, particularly threats of imposing higher tariffs, added to investor caution.
Trade Tensions and Tariffs: The imposition of tariffs, particularly those announced by U.S. President Donald Trump, such as a 25% tariff on Mexican and Canadian goods and an additional 10% on Chinese products, can lead to increased market volatility. These measures can disrupt trade flows, increase business costs, and potentially lead to retaliatory actions, which could heighten inflation in the U.S. and slow global economic growth. For instance, the recent announcements have already caused a flight to safety, elevating U.S. dollar and gold prices while depressing European equities.
Regional Conflicts: Ongoing and escalating conflicts, like the Russia-Ukraine war and tensions in the Middle East (Israel-Hamas, Iran, Lebanon), directly impact markets through disruptions in supply chains, particularly for commodities like oil and gas. These conflicts can lead to increased volatility in commodity prices, affecting industries dependent on these resources. Additionally, the war in Ukraine has notably influenced global equity markets’ returns and volatility, with effects more pronounced in countries with high reliance on Russian energy or those geographically close to the conflict zone.
Geopolitical Realignment: The shifting alliances and the rise of new geopolitical blocs, like the expanded BRICS+, could lead to a more fragmented global market, potentially diminishing the dominance of traditional reserve currencies like the U.S. dollar. This realignment might also affect foreign direct investment as capital flows are redirected along geopolitical lines, impacting emerging markets’ integration into global finance.
Geopolitical Risk Indices: The increasing frequency and intensity of geopolitical risks are reflected in indices like the Geopolitical Risk Index (GPR), which has shown spikes during significant events. High GPR values correlate with lower equity returns, higher market volatility, and increased investor caution, affecting both developed and emerging markets.
Sector Outlook
Sector
Consumer Discretionary
Consumer Staples
Communication Services
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Real Estate
Utilities
Outlook (relative to benchmark weighting)
Overweight
Underweight
Underweight
Neutral
Overweight
Neutral
Overweight
Underweight
Underweight
Underweight
Overweight
Sector Review
In this issue of the Smart Sector update, we note the recent highlights and lowlights for each sector’s top two holdings (by capitalization weighting) and identify which indicators are driving the composite model results. Financial statement results reflect the most recent earnings report releases.
Consumer Discretionary: (Amazon and Tesla.) In January 2025, Amazon.com, Inc. showcased impressive financial results, reporting a worldwide revenue of $158.9 billion for Q3 2024, reflecting an 11% year-over-year growth driven by strong performance across its segments, including North America, International, and AWS. The operating income soared to a record high of $17.4 billion, a remarkable 56% increase from the previous year, marking the highest quarterly operating income in the company’s history. AWS emerged as a key growth driver with a 19.1% revenue increase, achieving an annualized run rate of $110 billion. As a result, Amazon’s stock displayed an 8.34% return for the month and a 53.14% return over the past year. In contrast, Tesla faced significant challenges in January 2025. While the company reported record vehicle deliveries of 495,570 in Q4 2024, its annual sales declined for the first time in over a decade. Tesla’s Q4 revenue fell short of expectations at $25.71 billion, resulting in a 71% decline in net income to $2.3 billion. Despite these issues, Tesla is pivoting towards growth with initiatives like reducing manufacturing costs to below $35,000 per vehicle and launching a paid robotaxi service in Austin, Texas, scheduled for June 2025. The Composite model remains bullish, with measures of trend, overbought/oversold, breadth, valuations, and earnings surprises positive. There are signs that the uptrend may be stretched in the near term, with deviation from trend and short-term momentum indicators peaking. Nevertheless, the weight of the evidence remains positive.
Figure 3: Positive earnings surprises continue to support the consumer discretionary sector.
Consumer Staples: (Costco and Walmart.) Costco reported a strong sales growth of 8.2% in comparable store sales and an increase in its membership base to 61.2 million households. The company also expanded its global footprint by opening three new warehouse locations, bringing the total to 833. However, it faced difficulties, including a slight decline in gross margin to 11.2%, attributed to increased competition and pricing pressures. Additionally, e-commerce sales growth slowed to 6.3%, and the company’s stock price fell by 3.2%, raising investor concerns about maintaining growth momentum. Meanwhile, Walmart took significant steps with a comprehensive brand refresh to position itself as a tech-driven omnichannel retailer. The company expanded its same-day pharmacy delivery service nationwide and announced a $4.5 billion investment in Canada to enhance its store and supply chain presence. However, Walmart is contending with intensified competition in pharmacy delivery, potential tariffs affecting its supply chain, and rising concerns over retail crime, all of which present challenges in an increasingly competitive retail environment. The Composite model is negative, with technical and operating environment-related indicators continuing to deteriorate. Measures of trend, breadth, momentum, pricing power for staples, and food sales volumes are negative. The only bright spots are that the significant short interest that had built up around the sector’s constituents is declining (investors taking profits on their shorts), and valuations are a bit better than the average sector. Until the technical backdrop improves, we will remain underweight.
Figure 4: If the net new highs indicator moves to a buy signal, we will look to increase exposure.
Communication Services: (Meta and Google/Alphabet.) In January 2025, Meta (formerly Facebook) and Google both experienced notable highlights and challenges. Meta reported impressive quarterly results, with revenue increasing by 8% year-over-year to $32.6 billion and a net income rise of 5%. Additionally, the company’s shares reached five consecutive record highs, climbing 12% to $250 per share, and its metaverse division saw a 20% boost in user engagement. However, Meta faced rising operating expenses, which increased by 12% in Q4 2024, alongside ongoing regulatory scrutiny and internal restructuring, including a 5% workforce reduction and a rollback of diversity initiatives. Conversely, Google achieved significant milestones, with its share price hitting an all-time high, a 15% increase from the previous month. The company reported a robust 18% year-over-year revenue growth to $72 billion and a 20% growth in net income, bolstered by a 25% revenue increase in its cloud computing division. Nonetheless, Google contended with regulatory scrutiny due to antitrust investigations, setbacks in its self-driving unit Waymo following a fatal accident, and criticism regarding YouTube’s handling of misinformation. Both companies’ futures hinge on navigating these ongoing challenges while capitalizing on their respective strengths. The Composite model declined with the February update as price momentum and the pace of positive earnings revisions stalled.
Figure 5: Signs of price momentum stalling.
Energy: (Exxon and Chevron.) Exxon Mobil achieved record production levels, particularly in the Permian Basin and Guyana, with a total output of 4.6 million barrels of oil equivalent daily. The company also reported strong Q4 2024 earnings of $7.39 billion, surpassing analysts’ expectations, and successfully realized $12.1 billion in cumulative structural cost savings since 2019. However, it faced significant headwinds, including a sharp decline in refining earnings, which plummeted to $323 million from $3.2 billion the previous year, and a drop in full-year earnings from $38.57 billion to $33.46 billion. Similarly, Chevron’s January performance was mixed. The company experienced an 8% increase in share price, closing at $120, and reported robust Q4 2024 earnings of $5.2 billion. Notably, Chevron announced its commitment to invest $3 billion in renewable energy projects over five years. Nonetheless, it encountered legal challenges with a court ruling mandating $500 million in damages for environmental violations and a 2% decline in oil production due to maintenance issues. Overall, both companies demonstrated operational resilience while navigating significant market and regulatory challenges. The Composite model moved higher this month, with momentum, trend, and reversal from oversold indicators improving. The strong U.S. dollar has been a headwind, but it appears to be peaking (next chart). The net result is we remain neutral.
Figure 6: A weaker dollar would support U.S. energy exports.
Financials: (Berkshire Hathaway and JP Morgan Chase.) Berkshire Hathaway reported record cash reserves of $325.2 billion and achieved a 52-week high stock price of $491.67, contributing to its market capitalization surpassing $1 trillion. The company’s diversified business model across sectors like insurance and utilities continued to deliver stable returns. However, concerns arose from a decline in operating earnings to $4.68 per share due to reduced underwriting income and ongoing litigation related to the 2020 wildfires, prompting worries about the financial health of its subsidiary, PacifiCorp. Additionally, uncertainties regarding Warren Buffett’s succession plan weighed on investor sentiment. JPMorgan Chase also showcased strong performance, reporting Q4 2024 earnings of $3.57 per share, significantly exceeding estimates, supported by a 12% revenue increase in its consumer banking division. Its stock price surged to $165 per share, reflecting investor confidence. Despite these gains, the bank faced pressures from a $1.2 billion increase in loan loss provisions due to potential economic slowdowns, regulatory scrutiny regarding anti-money laundering compliance, and a 3% decline in net interest income attributed to a flattening yield curve. The Composite model increased with measures of trend, momentum, volatility, global economic activity, business credit conditions, and the yield curve positive. Negative indicators include weaker bank loan growth, some widening of credit spreads for financial institutions’ debt, and mild overbought readings. We remain neutral.
Figure 7: Credit spreads (OAS) for the Financials sector continued to move higher in January. While low historically, we are watching this development closely.
Health Care: (Eli Lilly and UnitedHealth Group.) Eli Lilly experienced strong revenue growth, expecting 2025 sales to reach between $58 billion and $61 billion, largely attributed to the successful launches of its new drugs, Mounjaro and Zepbound. The company also received approvals for Ebglyss in the U.S. for atopic dermatitis and Kisunla in Japan and Great Britain for Alzheimer’s disease. Additionally, positive clinical trial results for donanemab highlighted its commitment to innovative therapeutics. However, Lilly faced setbacks, including a revenue guidance cut for Q4 2024 due to sluggish incretin market growth and a $142 million non-cash goodwill impairment charge. Conversely, UnitedHealth Group reported a robust financial performance with 2024 revenues of $400.3 billion, an 8% increase from 2023, and projected 2025 revenues of $450 billion to $455 billion. Its Optum Health segment saw revenue growth driven by value-based care. However, the company dealt with the tragic murder of its CEO, Brian Thompson, impacting its annual investor conference and regulatory challenges concerning its proposed $3.3 billion acquisition of Amedisys. Both companies are navigating a complex landscape while focusing on strategic growth initiatives. The Composite model improved, with technical measures evaluating trend, momentum, mean reversion, and downside volatility turning positive. Indicators calling the operating environment, like health care new construction, medical CPI (pricing power), earnings revisions, and credit spreads, are negative. The net result is a modest increase in exposure, and we remain neutral.
Figure 8: Relative strength has turned positive.
Industrials: (GE and Caterpillar.) GE reported impressive Q4 2024 earnings of $0.82 per share, surpassing analysts’ expectations, with revenue reaching $17.35 billion—an increase of nearly 20% year-over-year. Additionally, GE’s renewable energy division experienced a 15% uptick in orders, bolstered by rising demand for wind turbines and solar power. A notable achievement was a $3.5 billion contract modification awarded by the U.S. Air Force for the Next Generation Air Dominance program. However, struggles in its aviation, healthcare, and power divisions, with revenue declines of 12%, 5%, and 7%, respectively, highlighted ongoing supply chain issues and shifting market dynamics. Conversely, Caterpillar celebrated a record adjusted profit per share of $21.90 in 2024, marking a 3% increase from the previous year, alongside the launch of a limited-edition line of machines for its centennial. The company also initiated a $5 billion share buyback program. Nonetheless, CAT faced a 3% overall sales decline, compounded by a 4% drop in mining equipment sales and looming economic and geopolitical uncertainties affecting future performance. The Composite model improved, with technical measures gaining ground. We are increasing exposure.
Figure 9: Commodity prices continue to rise.
Information Technology: (Apple, Microsoft, and NVIDIA.) Apple announced record revenue of $124.3 billion for Q1 2025, marking a 4% increase year-over-year, along with earnings per share (EPS) of $2.40, up 10%. The growth was bolstered by a strong services segment that reached an all-time high of $26.3 billion, thanks to robust performance in Apple Pay and the App Store. Furthermore, Mac and iPad revenues showed positive trends, increasing by 16% and 15%, respectively. However, Apple faced setbacks, notably with iPhone revenues declining by 0.8% to $69.14 billion, the largest miss in two years. Additional challenges included an 11% drop in Greater China revenue and a 2% decline in wearables sales. Conversely, Microsoft exhibited impressive growth, with cloud revenue surpassing $40 billion—up 21% year-over-year—and its AI business achieving a remarkable 175% growth, reaching a $13 billion annual revenue run rate. Investment in OpenAI reinforced Microsoft’s position in the generative AI sector. However, growth in Azure non-AI services fell short of expectations, and the company faced legal complications from a lawsuit involving Elon Musk. NVIDIA reported record quarterly revenue of $35.1 billion, a staggering 94% increase year-over-year, propelled by its data center segment and the launch of new GeForce RTX 50-series graphic cards. Despite these successes, challenges such as supply shortages and high pricing—especially for the RTX 50-series—limited accessibility for budget-conscious consumers, while gaming revenue was expected to decline sequentially due to these supply constraints. Overall, while each company demonstrated significant strengths in revenue and innovation, they also navigated notable market challenges. The Composite model declined with the February update, with measures of momentum, overbought/oversold, and breadth turning negative. Moreover, our earnings revisions indicator has turned negative as inflation expectations increase—historically negative for longer-duration assets like technology stocks. We are reducing exposure again this month.
Figure 10: The smoothed percentage of positive earnings revisions is rolling over.
Materials: (Linde PLC and Sherwin-Williams.) Linde PLC achieved a 12% year-over-year revenue growth for Q4 2024 and earnings per share that exceeded analyst predictions. The company announced a $5 billion share buyback program to enhance shareholder value further. However, it faced challenges, including supply chain disruptions that slightly impacted operating margins, market volatility reflected in a share price dip to a one-year low, and concerns regarding a debt-to-equity ratio of 0.43. Similarly, Sherwin-Williams reported a remarkable $23.10 billion in consolidated net sales for 2024, with a 9.5% increase in adjusted diluted net income per share to $11.33. The company’s share price rose 7% to $350 following the news, supported by the strategic acquisition of a smaller paint manufacturer. Nonetheless, it contended with supply chain difficulties that hindered operational efficiency, rising raw material costs impacting profit margins, and environmental criticisms related to certain chemicals in its products. The Composite model improved slightly but is still bearish, even though short-term momentum was evident as the sector rebounded from deeply oversold conditions. We remain underweight until we see additional model improvement.
Figure 11: Emerging Market weakness is still a headwind for the Materials sector.
Real Estate: (Prologis, Equinix, and American Tower.) Prologis reported a robust Q4 2024, with revenue increasing 12% year-over-year to $1.5 billion, alongside a remarkable 101.5% rise in net earnings per diluted share. The company’s occupancy rates remained strong at 97%, bolstered by strategic acquisitions of logistics facilities in Europe. However, it faced heightened competition affecting rental rates, and delays in its development pipeline due to supply chain disruptions. Equinix also demonstrated strong financial results, achieving 8% revenue growth to $1.6 billion, driven by demand for data center services. The inauguration of two new International Business Exchange data centers in Tokyo and Singapore marked its expansion into the Asia-Pacific region. Despite reaching a 52-week high, Equinix grappled with declining profit margins and challenges in securing long-term contracts in Europe. Meanwhile, American Tower experienced 8% revenue growth. The company announced a significant acquisition in the European market, enhancing its global positioning. However, regulatory challenges and increased debt levels due to the acquisition raised concerns, alongside guidance that fell below market expectations. While these companies showcased strong operational performances, they must navigate competition, regulatory hurdles, and market volatility to sustain growth. The Composite model improved modestly with some signs of mean reversion, but we remain modestly underweight.
Figure 12: Weakness in the homebuilders industry is negative for the Real Estate sector.
Utilities: (NextEra and Constellation Energy.) NextEra Energy appointed Alan Liu as its new CEO, marking a strategic leadership transition. The company was also recognized as the top electric and gas utility on Fortune’s 2025 “World’s Most Admired Companies” list for the 17th time in 19 years while reaffirming its long-term financial guidance. However, the company experienced significant lowlights, including a Q4 2024 earnings miss, with reported revenue of $294 million falling short of expectations by $56.95 million and a sharp decline in stock price following this disappointing report. Additionally, ongoing investigations prompted legal uncertainties. In contrast, Constellation Energy announced its plan to acquire Calpine in a $16.4 billion deal, positioning itself as the largest power generator in the U.S. They secured a landmark $1 billion contract with the U.S. General Services Administration, leading to a stock price increase of over 25%. Nevertheless, Constellation faces regulatory approval delays for the merger, a slight decline in profit margins, and heightened debt concerns, with its debt-to-equity ratio rising from 0.4 to 0.6. The Composite model improved significantly, with measures of trend, momentum, overbought/oversold, and breadth positive. Looking at the operating environment, the pullback in AI-related names due to the “DeepSeek” disruption has garnered concern for the Utilities sector, as expectations for exponential growth in energy demand may be overly optimistic. Nonetheless, given the model improvement, we are adding exposure.
Figure 13: The Utilities sector price momentum shows oversold conditions are still in place.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. Currently, the 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 uses 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.
For more information, please contact us at:
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Day Hagan/Ned Davis Research
Smart Sector® With Catastrophic Stop ETF
Symbol: SSUS
Disclosures
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. Day Hagan 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 Smart Sector® 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 in Fixed Income vestment 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. Day Hagan 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.
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There may be a potential tax implication with a rebalancing strategy. Re-balancing 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. Day Hagan 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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