Trade Date: May 26, 2022
Based on the May 26, 2022 model updates, the Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop strategy has taken a defensive position. Equity exposure was reduced to approximately 50% due to the Catastrophic Stop model turning bearish.
Financial markets have experienced increased volatility this year due to geopolitical conflict, inflationary pressures, tightening monetary policy, and elevated valuations. The Catastrophic Stop model processes these macro influences in multiple ways: For example, high yield option-adjusted spreads have widened and the trend is currently showing no signs of reversing. Also, the transports industry, which measures the health of the economy based on the movement of goods and people, has rolled over. Finally, none of the model’s technical indicators, which track how the market is processing macro influences, are bullish. The indicator weakness spans relative strength, trend, breadth, and volume supply/demand. In aggregate, the NDR Catastrophic Stop model’s message is one of caution.
There are two paths the market could take:
If the current Catastrophic Stop signal proves correct, the recent relief rally would likely fade into a retest of the lows, ultimately reaching levels of extremely pessimistic sentiment consistent with bear markets that have occurred concurrently with recessions. At that point, our models would then monitor for signs of significant capitulation. Once capitulation is confirmed, we would require signs of trend reversal. Historically, that confirmation would be signaled by improving demand statistics alongside breadth thrust indicators and increasing fund flows. Should this occur, our view is that it would likely set the stage for a second-half rally.
If the current Catastrophic Stop signal is incorrect, we likely have already seen a retest of the lows and the market would continue to push higher from here. The short-term trend and breadth measures should switch from bearish to bullish, returning the model to a fully invested state.
There are two sides to every strategy: when to sell and when to buy. The other side of this strategy is that we seek to get reinvested as soon as the models show risks have abated and the potential for reward has improved. Whether it takes one day, one week, one month, or several quarters, the Ned Davis Research models will guide our investment path.
For now, this weight-of-the-evidence approach suggests caution until the indicator evidence changes.
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, as well as where to place that capital.
Please give us a call if you would like to discuss in more detail.
Donald L. Hagan, CFA®
Arthur S. Day
Regan Teague, CFA®, CFP®
P. Arthur Huprich, CMT
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
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.
Originally published by Day Hagan on 26 May, 2022.
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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.
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.
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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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