Grow Your Portfolio the Intelligent Way

Tangled Up In Capitulation   

By Jim Woods

I lived with them on Montagüe Street
In a basement down the stairs
There was music in the cafés at night
And revolution in the air

–Bob Dylan, “Tangled Up In Blue”

Stocks have witnessed a very robust comeback over the past week, and almost under the radar, the Nasdaq Composite has climbed more than 10% over the past month. The S&P 500 and Dow Industrials also have done well, up some 8% and 6.8%, respectively, in the past month. 

So, why the recent rebound in stocks? After all, the Federal Reserve is still hiking interest rates, inflation is still at a four-decade-plus high and the economic data on growth is beginning to show its recessionary colors.

Well, one reason why is that market sentiment is just much too bearish right now, and we know that because some of the best market sentiment indicators are all tangled up in capitulation. 

In this morning’s Eagle Eye Opener, my “secret market insider” astutely pointed out that capitulation, or what he calls “extreme pessimism,” is rampant among investors right now, and that this is traditionally a contrarian signal that predates a big rebound in markets. 

Let’s take a look at an excerpt from this morning’s Eagle Eye Opener, as it will do all of the explanatory heavy lifting…

The S&P 500 closed above the 50-day moving average for the first time since April and traded to a three-week high, as the rally from the June lows continues to gain steam. This is easily the most bullish price action we’ve seen from stocks since March.  

Importantly, there are “reasons” for the rally. Markets have firmly seized onto the hope that we are close to 1) Peak inflation, 2) Peak Fed hawkishness and, as a result of the first two, 3) Peak U.S. dollar strength (which should ease pressure on earnings if the dollar decline continues).  

The “hope” for these peaks is founded on the following: 1) Commodity price declines, 2) The University of Michigan Consumer Sentiment survey falling back below 3.0% for the first time in months, and 3) A drop in the price indices in the Empire Manufacturing survey.  

Notably, this hope flies in the face of what is typically more important data points such as the Consumer Price Index (CPI) (40-plus-year high), the Producer Price Index (PPI) (11% gains yoy and climbing), and massive recession risks in Europe and the United Kingdom courtesy of surging energy prices, following the Ukraine war (which would further weigh on the euro).

Point being, while I very much appreciate that markets are always forward looking and are constantly pricing in “what’s next,” normally there’s a bit more actual evidence underwriting market optimism. Put differently, hope combined with some favorable motion from some second-tier data points isn’t usually enough to cause a solid rally (or at least the most solid one we’ve seen in a few months).  

But there is one ingredient that’s helping to fuel this rally despite the lack of actual fundamental progress: Extreme pessimism.

Yesterday, Bank of America released its monthly fund manager survey, and their conclusion was clear: Investors are so bearish it implies capitulation. Some highlights (or low lights) of the survey include:

  • Recession expectations the highest since the pandemic, and before that the 2008 financial crisis
  • Stock allocations are at their lowest since 2008
  • Cash is at its highest since 2001
  • Growth and profit expectations are at all-time lows
  • The most risk-averse behavior is occurring since October 2008

This extreme pessimism has combined with the hope of the aforementioned peaks to spark the best rally we’ve seen in months — and it raises the question as to whether markets have become so pessimistic that perhaps it will lead to a bottom before we get actual, real improvement in fundamentals (remember inflation keeps getting worse every month, as do Fed hiking expectations and earnings warnings — we haven’t seen an actual “low” in any of them yet).

Certainly, that’s a possibility. But before anyone focuses on the fact that sentiment is so low, I’ll provide this reminder:

  • The S&P 500 kept falling until March 2009  
  • Levels cited in the Bank of America survey implied capitulation was all in 2008
  • The S&P 500 fell from 1,161 on October 1, 2008, to 676 on March 9, 2009  

The point here is that sentiment bottomed out in these indicators in late 2008 because the Fed passed Trouble Asset Relief Program (TARP) and was coming to the rescue, but that didn’t stop the economic or earnings destruction already underway.

Right now, no one is coming to the rescue. The Fed is about to hike rates again by 75-100 basis points and there’s another hike after that is coming in September (and probably more after that).

Markets are rallying on the hope that a big inflection point with the Fed is looking likely in the coming months, but there’s no real proof it’s actually going to happen in the coming months!

To be clear, I’m not a perma-bear and I’m not trying to pooh-pooh the best price action we’ve seen in months. I enjoy watching my personal account on days like yesterday a lot more than most days of late, and I very much hope a bottom is in. Moreover, I very much hope I’m wrong being skeptical.  

I do want to continually point out that, from an economic and earnings standpoint, we have not even really started to feel the impact of the soon-to-be, 200-plus basis points of tightening that’s occurred since March. For reference, over the past two decades it’s taken the Fed years to raise fed funds 200 basis points. This time they’ll do it in essentially 4 1/2 months, and that will combine with quantitative tightening hitting full speed at the end of the summer.  

While I hope markets have bottomed, and I hope extreme pessimism can result in capitulation, it’s my job to point out the underlying factors behind market moves, and the bottom line is neither the economy nor corporate earnings have felt the full brunt of Fed tightening.


So, there you have it, an outstanding explanation of not only why this market’s extreme pessimism might lead to more buying ahead, but also a tempered analysis of the factors that may prevent this latest buying trend from continuing in the near future. 

If you’d like to get analysis like this every trading day, before the market opens, then I invite you to check out the Eagle Eye Opener, today. For just a few dollars a week, you’ll be equipped with the same analysis that Wall Street pros use to make key market decisions. And after reading it, you’ll really know what’s making this market go. 


ETF Talk: A Health Care Recession Play

When we look at the market so far in 2022, you don’t need me to tell you that the market has taken a beating.

While there have been some days of late where it seems that the bulls have defeated the bears and the market rose a bit as a result, overall, it seems that the bears are still driving the market bus. Such a negative market milieu has impelled many investors to turn to defensive sectors to protect their hard-earned money.

One such sector is health care. Indeed, according to Reuters, health care is the sector of the S&P 500 that has performed the best. So far this year, it has only fallen by 8.7%. For comparison, the S&P 500 has fallen by 20% over the same time frame.

A large part of this enthusiasm for the health care sector is due to the reasonable valuation of the stocks in the sector (as compared to, say, technology) and the confidence of investors that the sector is in good shape if the country were to slide into a full-blown recession due to excessive monetary tightening by the Fed.

History, again, according to Refinitiv IBES data, seems to bear this out. During the Great Recession, the sector posted earnings growth, while earnings for the entire market fell for several consecutive months.

One health care-related exchange-traded fund (ETF) is the Vanguard Health Care Index Fund (NYSEARCA: VHT).

This ETF tracks an index of health care companies in the United States. The fund’s managers define “health care” rather broadly, ensuring a healthy mix of sectors in the portfolio. In addition, a policy that no group entity exceeds 25% of the weight of the index, as well as a rule that the aggregate weight of issuers with over 5% weight is capped at 50% of the portfolio, ensures a degree of diversification.

The top holdings in the portfolio are Johnson & Johnson (NYSE: JNJ), UnitedHealth Group (NYSE: UNH), Pfizer Inc. (NYSE: PFE), AbbVie, Inc. (NYSE: ABBV), Eli Lilly and Company (NYSE: LLY), Merck & Co., Inc. (NYSE: MRK), Thermo Fisher Scientific (NYSE: TMO) and Abbott Laboratories (NYSE: ABT).

As of July 20, VHT has been up 9.16% over the past month and down 6.20% for the past three months. It is currently down 9.51% year to date.

Chart courtesy of

The fund has amassed $16.07 billion in assets under management and has an expense ratio of 0.10%.

In short, while VHT does provide investors with access to health care stocks, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors always should conduct their due diligence and decide whether the fund is suitable for their investing goals.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.


In case you missed it…

Life’s A Renaissance Man’s Game 

Greetings from The Mirage Hotel in Las Vegas, where I’m about to begin the best week of the year, i.e., the week of FreedomFest!

Right about now, I’m preparing to saturate my mind with all-things liberty, because one of the most important elements of being a good human is to think clearly and know a lot about the world. That’s what FreedomFest helps me do.

Now, one of the panels I will be speaking on is titled, “Beyond Wealth: How to Think, Act and Live Like a Renaissance Man.”

So, in the spirit of this panel, I thought I would give The Deep Woods readers their own dose of what I think it means to think, act and live like a Renaissance Man. So, here you go…

Life’s a Renaissance Man’s game.

Now by “man,” or “Renaissance Man,” I don’t mean to exclude females. In fact, I know plenty of females who are “manlier” and more Renaissance Man than their male counterparts. When I refer to a Renaissance Man, I am referring to a way in which to approach and interact with the world. Think of it as short hand for a mindset, a way of life, a way of engaging with reality and a way of setting your own mark in the world… and enforcing that mark.

You see, life is tough.

Life will kick you in the butt and smack you down if you let it.

There’s a great lyric from the very-manly punk rocker Henry Rollins in his song “Blues Jam,” that I found very compelling when I heard it some 25 years ago. It goes like this…

Believe me when I tell you
Life will not break your heart
It’ll crush it…

As dark a sentiment as that is, the reality is that part of being a Renaissance Man is facing that heartbreak dead on, absorbing the blow… and then soldiering on in pursuit of your goals.

Indeed, it’s the cultivation of resilience, focus in the face of adversity and laughing in the face of your enemies that makes a man a true Renaissance Man. And in doing so, a man is able to embrace his struggle, enjoy his wins and, most importantly, enjoy the one and only life he has to live.

So, I say… take on that life as a Renaissance Man!

But what does this mean in practice? The way I see it, there are eight basic keys to cultivating a Renaissance Man mindset.

1) Let reason be your guiding light. Use your emotions as a tool to help you decide your course, but make sure emotions are always placed in the service of your rational faculty. 

2) Work hard and make smart decisions. There’s no substitute for effort, and there’s no replacing intelligent, reasoned exertion. A Renaissance Man always works hard to determine the smartest course of action.

3) Be the kind of person you’d want to be around. That means be a good friend, a good spouse, a good father, a good boss, a good teacher and a good student — and especially be an aggressive participant in life.

4) Lead a moral existence. Be honest, and act in such a way that helps yourself, your loved ones, your community and the world become a better place.

5) Make a commitment to learning. Read books, read articles, and study subjects you’re interested in. Go to lectures, listen to podcasts, and surround yourself with interesting people. Make learning a life-long commitment. Learning is one of the most rewarding things a Renaissance Man can do.

6) Do things you aren’t good at. Struggle is often the key to growth. Don’t be afraid to learn new skills, or a new language, or a new sport, etc., even if those activities don’t come to you easily. Working through self-imposed struggle is good for a Renaissance Man. If you only do things you’re already good at, you’ll never grow.

7) Enjoy the doing. In Ayn Rand’s novel (the writer is definitely a “Renaissance Man”) The Fountainhead, protagonist Howard Roark says the following: “Before you can do things for people, you must be the kind of man who can get things done. But to get things done, you must love the doing…”. Be a man who loves the doing, and you’ll be a Renaissance Man who achieves.

8) Make smart money decisions. Don’t take on too much debt. Don’t buy more than you can afford. Don’t waste your money on get-rich quick schemes or shaky partnerships. Here, especially, it’s important to fix reason firmly in her seat, and call to her tribunal every fact, every opinion. Don’t allow yourself to be a victim of B.S. Finally, invest smart, and with patience and discipline.

It is this final principle that gets the most attention in my investment newsletter advisory services. If you check those services out, you’ll learn all the specific ways in which I recommend investing to achieve your financial goals.

By applying these eight keys to cultivating a Renaissance Man mindset, you’ll be well on your way to becoming the kind of man you should aspire to be.


A Little Something on Choice

“Today, I choose life. Every morning when I wake up I can choose joy, happiness, negativity, pain… To feel the freedom that comes from being able to continue to make mistakes and choices — today I choose to feel life, not to deny my humanity but embrace it.”

–Kevyn Aucoin

In every moment you have a choice. The choice is to recognize that moment and embrace it, or to let it overwhelm you and control your thoughts and therefore your emotions. Well, today I choose to feel life, and to embrace my humanity — and it’s something that I recommend you do every moment. 

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

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