Day Hagan Catastrophic Stop Update December 3, 2024
A downloadable PDF copy of the Article:
The Catastrophic Stop model is unchanged from last week’s level of 60.7%. The Internal Composite is bullish, and the External Composite is neutral.
Figure 1: The Catastrophic Stop model is moving toward neutral from bullish levels.
From a technical perspective, the longer-term uptrend remains intact, with 75.75% of S&P 500 stocks above their 200-day moving averages. Note the divergences that occurred prior to the GFC and 2022 peaks. The Covid pandemic was a different animal.
Figure 2: Percent of S&P 500 stocks above their 200-day moving averages.
Tracking advancing versus declining volume provides a more detailed look at where investors are placing their capital. We tend to look for extremes and subsequent reversals from those levels. For example, over the past 10-, 21-, and 50-day periods, the Industrials and Consumer Discretionary sectors have been attracting assets, while Utilities have seen selling. Note the volume-related reversals whereby the Materials, Consumer Staples, Health Care, and Real Estate sectors are starting to benefit from increasing demand. Meanwhile, the Information Technology sector is evidencing a negative volume reversal (based on the 10-day level vs. the 21-day level).
Figure 3: Advancing volume picking up in defensive and cyclical sectors. We added slightly to these positions with this month's rebalance.
In this month’s Smart Sector Update, for the S&P 500’s eleven sectors, we reviewed each sector’s largest two stocks' latest earnings releases. We have also provided them for each of the three sectors highlighted below. For the remainder of the research, please visit https://dayhagan.com/research.
Information Technology: Apple (AAPL) showcased its commitment to innovation with the announcement of new products and software across its Mac, iPad, iPhone, and Wearables lines. The company reported a robust 13% year-over-year growth in services revenue, demonstrating the strength of its services segment. Additionally, AAPL’s gross margin improved to 46.2%, rising from 44.1% the previous year, largely driven by cost-saving measures and an advantageous product mix. However, challenges emerged as net sales in Greater China fell by 8% year-over-year, attributed to declining iPhone and iPad sales and the weakening Chinese renminbi. Furthermore, the Wearables, Home, and Accessories category reported a 7% drop in sales, and an increased effective tax rate of 24.1% resulted from a $10.2 billion one-time tax charge linked to the State Aid Decision, along with a higher rate on foreign earnings. NVIDIA (NVDA) demonstrated significant revenue growth, fueled by strong demand for its Hopper computing platform tailored for AI and data center applications. The company broadened its data center product offerings to include solutions that bypass export control requirements, enabling continued revenue growth, especially in China. Gross margins benefited from an increased proportion of data center revenue. Nevertheless, NVDA faces looming supply constraints, anticipating that demand for its Blackwell data center architecture will outstrip supply in several quarters in fiscal year 2026. Additionally, as the frequency of new product transitions rises, the potential for quality issues and revenue volatility may increase, compounded by new U.S. export control restrictions that threaten its competitive standing. Microsoft (MSFT) reported a 22% increase in Cloud revenue, reaching $38.9 billion, with Microsoft 365 Commercial cloud revenue climbing 15% and Azure services expanding by 33%. This cloud growth reflected increasing demand, particularly for AI services. However, ongoing investments in cloud and AI infrastructure are expected to elevate operating costs, potentially pressuring margins. Furthermore, extended disruptions in the supply chain for device components may hinder timely manufacturing of consumer devices. The sector’s technical indicators have turned negative on balance, with the external model still supportive. We remain neutral.
Figure 4: Declining volume within the Information Technology sector has increased over the past 10 days, reversing the 21- and 50-day volume trends.
Consumer Staples: Costco is executing its top-line growth strategy effectively by offering high-quality goods at competitive prices, which resonates with its member base. The company’s e-commerce segment is thriving, particularly in categories like appliances and health products, boasting double-digit growth. Additionally, Costco has managed to lower prices on various Kirkland Signature items, benefiting consumers directly. Conversely, Procter & Gamble’s core business, which accounts for 85% of its sales, is showing consistency with a 4% growth rate over recent quarters. The company is experiencing market share growth, particularly in North America and Europe, with strong performance across several categories. Procter & Gamble’s innovation plans for the latter half of the fiscal year aim to sustain this growth trajectory. Nonetheless, the company is grappling with challenges, particularly in China and the Middle East, where organic sales have declined markedly. Additionally, its baby care segment is under pressure from declining birth rates, and the SK-II brand has seen a troubling 35% drop in sales in China, posing significant hurdles for resurgence in that market. The composite model remains weak, with technical and operating measures negative. Credit conditions, sector-related credit spreads, pricing power, and the positive economic backdrop (staples are defensive holdings and typically do better when the markets are under duress) are headwinds.
Figure 5: Advancing volume within the Consumer Staples sector has increased over the past 10 days, reversing the 21- and 50-day negative volume trends.
Health Care: Eli Lilly demonstrated impressive revenue growth of 42%, excluding the impact of its divested olanzapine portfolio, largely fueled by the success of new products like Mounjaro and Zepbound. The company also made significant progress in its pipeline, with approvals for Ebglyss, targeting atopic dermatitis, and Kisunla for Alzheimer’s disease. Lilly’s commitment to expansion is evident through its substantial investments in manufacturing, including a $2 billion facility in Ireland and the $4.5 billion Lilly Medicine Foundry. However, Lilly faced challenges, including channel inventory volatility that impacted Mounjaro and Zepbound sales. Additionally, the company reported $2.8 billion in acquired IPR&D charges, primarily from the Morphic Therapeutics acquisition, which negatively influenced its effective tax rate. Marketing, selling, and administrative expenses also surged by 16%, reflecting efforts to promote ongoing and upcoming product launches. Meanwhile, UnitedHealth Group experienced robust revenue growth, reaching $100.8 billion—an increase of $8.5 billion year-over-year. The company’s consumer base expanded by 2.4 million to a total of 29.7 million, and Optum Health revenue rose by $2.1 billion, driven by enhanced value-based care services. However, challenges included rising medical costs, with the medical care ratio increasing to 85.2%, and the absence of favorable developments related to medical reserves, adversely affecting earnings. Additionally, a cyberattack on Change Healthcare had negative repercussions on third-quarter earnings. The composite model is bearish, with measures of trend, momentum, breadth, volatility, and earnings revision breadth negative, while sector-specific credit spreads are widening. We are currently underweight. A decisive reversal confirmed by our array of technical indicators would allow us to increase exposure.
Figure 6: Advancing volume within the Health Care sector has increased over the past 10 days, reversing the 21- and 50-day negative volume trends.
While green shoots are appearing around the defensive and cyclical sectors, we require model confirmation before radically changing our stance. As you can see in the chart below, the SHUT index (Staples, Health Care, Utilities, and Telecom) remains below the 50- and 200-day moving averages. A decisive break above those levels would likely lead to rebalancing and reducing risk in the portfolio.
Figure 7: The SHUT’s defensive sectors have yet to break out.
Our current sector views for December are below. Positions are subject to change.
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
Neutral
Neutral
Neutral
Overweight
Underweight
Neutral
Neutral
Underweight
Neutral
Neutral
Turning to shorter-term conditions, the NDR Daily Trading Sentiment Composite shows the most “Excessive Optimism” since January 2024. While we view this as a headwind, we note that the S&P 500 continued higher from January 2024 into late March before experiencing a slight decline and then reaccelerating into July’s peak.
Figure 8: Sentiment is a headwind, but it is only a market condition. The technical indicators within the Catastrophic Stop model are still positive, and that’s what provides the triggers for a rebalance.
Bottom Line: The Catastrophic Stop model’s indicators have moved more toward neutral levels (a decline below 40% for two consecutive days generates a sell signal). This sets the model up to latch on to the next major trend. Importantly, the quantitative, unemotional outlook confirms that economic growth is decelerating but still positive overall. Inflation pressures continue to diminish, and Central Banks remain relatively dovish. As our indicators shift, we will adjust the portfolio accordingly, up or down. At this point, our models' collective message is that the uptrend is intact.
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. 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 utilizes 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.
If you would like to discuss any of the above or our approach to investing in more detail, please don’t hesitate to schedule a call or webinar. Please call Tyler Hagan at 941-330-1702 to arrange a convenient time.
I hope you have a wonderful week,
Sincerely,
Donald L. Hagan, CFA
Chief Investment Strategist, Partner, Co-Founder
Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. Charts courtesy Ned Davis Research (NDR). © Copyright 2024 NDR, Inc. Further distribution is prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
Disclosures
S&P 500 Index – An unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks.
S&P 500 Total Return Index – An unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. This index assumes reinvestment of dividends.
Sentiment – Market sentiment is the current attitude of investors overall regarding a company, a sector, or the financial market as a whole.
S&P 500 Information Technology – Comprised of those companies included in the S&P 500 that are classified as members of the GICS information technology sector.
Disclosure: The data and analysis contained herein are provided "as is" and without warranty of any kind, either express or implied. Day Hagan Asset Management, any of its affiliates or employees, or any third-party data provider shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. Day Hagan Asset Management accounts that Day Hagan Asset Management or its affiliated companies manage, or their respective shareholders, directors, officers, and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. Day Hagan Asset Management uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. The performance of Day Hagan Asset Management’s past recommendations and model results is not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends, or avoid losses.
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trail, Sarasota, FL 34236
Toll-Free: (800) 594-7930
Office Phone: (941) 330-1702
Websites: https://dayhagan.com or https://dhfunds.com
© 2024 Day Hagan Asset Management
