Basketballs Under Water: 3 Defensive and 3 Higher-Beta Ideas
April 15, 2025
9 min read
Basketballs Under Water — 3 Defensive and 3 Higher-Beta Ideas
When markets fall, watch what holds up. Three defensive and three higher-beta basketballs — ready to snap upward as soon as pressure eases. Our original analysis for The Market by NZZ — plus the extended investor's view on the capitulation mechanics and defensive-vs-beta selection.
In 30 seconds — the core thesis
- Capitulation signals are converging — elevated ETF volume, rising VIX, high put/call ratios, 91% down-volume days. The peak of pressure may be behind us.
- Three defensive + three higher-beta basketballs. The two categories address different investor profiles — defensive for risk-averse, higher-beta for those wanting to be positioned early in the recovery.
- Relative strength is the common quality marker. Both categories are basketballs because they hold up better than the broad market — and can structurally recover above-average after pressure eases.
The original analysis — the opening
A month ago I wrote about the concept of basketballs under water.
Since markets have recently tested important support zones and show signs of capitulation — including for example elevated ETF volume, a rise in the VIX volatility index, rising put/call ratios, and 91% down-volume days — the peak of pressure on some of these basketballs may now be behind us.
As a reminder: the term basketballs refers to stocks temporarily pressed down by general market conditions, but with strong recovery potential once selling pressure eases. In such an environment, relative strength becomes the hallmark of a high-quality stock: those are the stocks you want to own as an investor.
Below we look at three defensive and three higher-beta basketballs that are currently being pushed under water.
→ Read the full article with the six concrete stock picks on The Market by NZZ
Chart 1: Volume of $SPY S&P 500 ETF; high volume at lows is a sign of capitulation
Source: NZZ The Market
01The uncomfortable question: what does capitulation actually mean — and how do you recognise it?
«Capitulation» is a word market commentators frequently use without defining precisely. In an NZZ column, the four capitulation signals (ETF volume, VIX, put/call ratio, 91% down-volume days) are mentioned — but the mechanical meaning of each deserves depth that doesn't fit the NZZ format. Capitulation isn't a feeling, but a measurable technical phenomenon — and exactly that's what makes it valuable as a turning-point indicator.
What the four capitulation signals structurally mean:
- Elevated ETF volume at lows shows that even passive investors and index fund holders are selling their positions — typically the "last seller", because this group is normally the most patient. When they capitulate, the buyer-seller balance is often at its worst and tips structurally.
- Rise in VIX above typical crisis thresholds (30+, in extreme phases 50+) shows extreme options-market hedging activity. High VIX readings are historically correlated with subsequent market recoveries because hedging has reached its peak.
- Rising put/call ratios show extreme pessimism — many market participants buy put options as insurance. When this ratio rises to historical extremes, the bearish positioning is so over-extended that even smaller positive news can trigger disproportionate recoveries.
- 91% down-volume days are days where 91% of total NYSE trading volume occurs in declining stocks. Statistically such days are often turning-point markers because they show maximum selling concentration.
Why signal combination is more important than any single signal
Each of the four signals individually can be misleading — VIX spikes without volume confirmation are often one-day flies. 91% down-volume days without sentiment extremes are often trend continuation rather than turning point. Only the combination of multiple signals simultaneously creates a robust turning-point indication. Disciplined investors don't wait for the newspaper diagnosis «capitulation» but observe the signal combination independently — and react with their prepared shopping lists.
02Defensive vs. higher-beta basketballs — the two recovery strategies
The NZZ column deliberately distinguishes between three defensive and three higher-beta basketballs. This distinction isn't accidental — it reflects two structurally different recovery patterns and fits two different investor profiles:
Defensive Basketballs
Stable core businesses with relative strength
Established quality businesses with stable cash flows, often consumer staples, healthcare or utilities. In corrections they fall significantly less than the market. In the recovery they don't rise as explosively as higher-beta businesses — but with significantly lower drawdown risk if the recovery stalls again. Suitable for investors with focus on risk reduction.
Higher-Beta Basketballs
Quality businesses with cyclical component
Structurally solid businesses, but with higher sensitivity to economic cycle or sector trends. In corrections they fall more than defensive names — but if they show relative strength, that's a particularly strong quality signal. In the recovery they typically rise significantly above-average. Suitable for investors with higher risk tolerance and longer investment horizon.
Most retail investors intuitively choose exclusively defensive names in corrections — that feels safer. Structurally, however, the mix of both categories is typically superior: defensive anchors stabilise the portfolio, higher-beta positions deliver the above-average recovery returns. The right mix ratio depends on individual risk tolerance and investment horizon.
Important note: arvy doesn't make individual-stock recommendations
The specific stock picks from the NZZ column are illustrative examples for the application of basketballs logic in spring 2025. arvy has invested in quality businesses for years, often with overlap to such NZZ picks — but we don't publish individual-stock recommendations for other investors. The concrete arvy allocation is transparently documented in the Q1 2026 quarterly report. What's permanently transferable is the identification framework — the defensive-vs-beta logic you can apply to any future correction, regardless of the specific market environment of 2025.
03What this means for concrete stock selection
The basketballs logic will be highly relevant multiple times in your investing life — at every correction. The question isn't whether you'll apply it, but how systematically. Four concrete selection steps that operationalise the framework:
| Step | What to do |
|---|---|
| 1. Drawdown comparison | For each watchlist candidate, calculate the drawdown from last high versus the index drawdown (S&P 500 or MSCI World). Real basketballs have <50% of the index drawdown over 4-8 weeks. |
| 2. Fundamental validation | Check the latest quarterly numbers — top line stable or growing? Margins stable or improved? Cash generation intact? If yes, the stock weakness is pure sentiment, not substance. |
| 3. Defensive-vs-beta classification | Check beta against market index. <0.7 = defensive, 0.7-1.2 = neutral, >1.2 = higher-beta. This helps calibrate expectations for the recovery phase. |
| 4. Position sizing | Defensive basketballs 4-7% per position, higher-beta 2-4% per position — because of higher volatility. Spread the selection across 6-10 positions. |
| Investor profile | Recommended basketballs mix | What to review |
|---|---|---|
| Conservative, low risk tolerance | 80% defensive, 20% higher-beta | Long-term value growth with protection against further drawdowns |
| Balanced, medium risk tolerance | 60% defensive, 40% higher-beta | Classic balance — stability plus recovery leverage |
| Growth-oriented, higher risk tolerance | 40% defensive, 60% higher-beta | Maximisation of recovery returns, accepts higher volatility |
| Pure index investors | Not really applicable | Hold discipline, continue normal savings plan |
The theoretical basis of this approach — what basketballs are, why relative strength is the quality marker, how psychological discipline excludes the majority of investors — is deepened in our concept companion "In Times of Market Turmoil, Look for Basketballs Under Water". The quality mechanics behind it are described in our pillar "The Tortoise Problem".
04Three scenarios — how capitulation signals typically resolve
Capitulation signals are probabilistic turning-point markers, but no guarantees. The three plausible paths:
Bull Case
Capitulation marks actual low — V-recovery follows
The combination of all four signals (ETF volume, VIX, put/call ratio, 91% down-volume days) marks the actual low. In the following 4-12 weeks the broad market recovers 15-25%, the identified basketballs (especially the higher-beta names) deliver disproportionate returns — typically 30-50% in this phase. Statistically the most common pattern after real multi-confirmed capitulation.
Base Case
Capitulation marks intermediate low — bottoming over several months
The signals mark an important low, but the market tests the level again in the following 2-4 months. Gradual purchases at the test phases deliver better average prices. Defensive basketballs lead the gradual recovery, higher-beta names follow with delay. Over 12 months both categories deliver above-average returns versus broad market. Our base case.
Bear Case
Capitulation was just intermediate recovery — structural bear market phase follows
Despite signal convergence it wasn't a real turning point. A short recovery is followed by another decline phase with additional 15-25% loss. Defensive basketballs hold relatively stable, higher-beta names fall again, often even more strongly than at the first drawdown. In this scenario early buyers are psychologically challenged — but if the selection was structurally quality, the returns come, just with longer investment horizon.
05What you should review now
Even if you read this analysis years after 2025 — the basketballs mechanics will be reactivatable in every future correction. Four concrete checks that apply timelessly:
1. Set up capitulation signal tracker. Systematically observe the four signals (ETF volume, VIX, put/call ratio, 91% down-volume days) in every correction. A simple spreadsheet or Trading-View watchlist suffices. Without tracking you only react to headlines — with tracking you see signal convergence before most other investors.
2. Defensive-vs-beta classification of your watchlist. Classify each of your 20-30 quality champions as defensive or higher-beta. In the next correction you then immediately know which position follows which strategy. This preparation takes an hour — and saves days of stress research in the correction.
3. Define position sizing rules in advance. Define now, in calm market phase, how much you'd invest in defensive vs. higher-beta basketballs in a typical correction. Documented in writing. This advance discipline protects you from buying too concentrated or too diffuse in the correction.
4. Calibrate recovery expectations. Statistically accept that not every correction ends in V-recovery. Anyone betting exclusively on bull-case scenarios is disappointed in U-recovery patterns and panicked in bear-case patterns. Realistic scenario diversification is the best psychological preparation.
What disciplined investors do after capitulation signals
They don't react hectically to every signal spike. They wait for signal convergence — multiple indicators simultaneously in extreme. Then they activate their prepared watchlist, check the defensive-vs-beta classification, and buy gradually in 3-5 tranches over 4-8 weeks. They check every 2 weeks whether the fundamental thesis (top line stable, margins intact) still holds. They don't sell at the first recovery, but hold the quality businesses long-term. This discipline systematically delivers above-average returns in the 4-6 major corrections of an investing life.
06Frequently asked questions
Which stocks were named in the NZZ column?
The six concrete picks (three defensive + three higher-beta) you find in the original NZZ column — it's linked above. We don't publish the specific names here because our focus is on the transferable mechanics. Stocks that were basketballs in spring 2025 may no longer be today — but the method remains timelessly valid.
Did the April 2025 capitulation thesis prove true?
You can answer this question yourself by market course comparison. The capitulation-typical signals documented in April 2025 corresponded to historical turning-point patterns. What remains valid independent of the individual case: the convergence of the four signals is statistically a robust turning-point indication. That applies to any future correction as well as April 2025.
Should I have both defensive AND higher-beta basketballs?
Structurally yes — the mix is typically superior because defensive names stabilise the portfolio and higher-beta names deliver the above-average recovery returns. The right ratio depends on your personal risk tolerance and investment horizon. Conservative investors 80/20 defensive/beta, balanced 60/40, growth-oriented 40/60.
How does arvy invest in basketballs phases?
arvy strategically holds a cash reserve that is gradually shifted into identified quality champions with relative strength in correction phases. The exact mechanics and concrete positions you find transparently documented in the arvy Quarterly Report Q1 2026.
Further reading — the thematic anchors of this analysis
Basketballs Concept (March 2025)
The theoretical basis of this stock selection
The Tortoise Problem
Quality as structural defence line
Master Your Emotions When Investing
Discipline in capitulation phases
The Crocodile Will Soon Snap
When divergences warn of corrections
Investing in Turbulent Times
Quality across full market cycles
arvy Quarterly Report Q1 2026
Current allocation transparently documented
Concrete picks fade, the framework stays
The six stocks that were basketballs in April 2025 will probably no longer be basketballs in five or ten years — they will either have become full bloomers or been replaced by other quality businesses. What remains is the identification framework: the four capitulation signals, the defensive-vs-beta classification, the position sizing rules, the patience of gradual purchases. Anyone who has internalised this framework once has a timeless strategy for any future market turmoil.
Most retail investors will experience the next corrections like all previous ones — with panic sales at the low and FOMO purchases at the new high. The few disciplined investors will experience the same corrections like disciplined collectors: as rare opportunities to build quality businesses at reasonable prices. Over 30 years of investing life you experience 4-6 major corrections. Anyone using the basketballs discipline in each builds a mathematically guaranteed lead — quality plus discipline reliably beats majority behaviour over long periods.
Original written by Thierry Borgeat, Co-Founder of arvy, for The Market by NZZ. The extended arvy companion piece reviewed by Patrick Rissi, CFA and Florian Jauch, CFA. Data sources: NZZ The Market, own analyses, AAII Investor Sentiment Survey (public), CBOE VIX data, NYSE volume statistics. Last updated: April 2026.
Disclaimer: This article is for general educational purposes and does not constitute personal investment advice. The referenced NZZ stock picks are illustrative examples and not buy or sell recommendations. Past performance is no guarantee of future results. Scenarios are assessments, not forecasts. arvy is a FINMA-supervised asset manager with a CISA licence (Art. 24). Imprint & Legal Notice.
