Weekend Reading: The Greatest Paradox in Markets

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
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Weekend Reading

Some say an investor’s worst enemies are fear and greed. These emotions have the power to drive markets to extreme highs and lows, and as noted here, we’ve seen such instances occur over the past few years.


They are as follows:

📌 Fear, on March 12, 2020: Marked as one of the “most oversold readings in history”, investors on this day saw just one percent of S&P 500 stocks close above their 50-day moving average. The market was down 27 percent from February 2020, and continued to move lower.

📌 Greed, on May 28, 2020: After being in an extremely oversold state, stocks did what they do best: bounced back. On this day, 96 percent of S&P 500 stocks closed above their 50-day moving average, and rose 40 percent above the lows experienced in March. They then peaked at 60 percent in January 2022.

📌 Fear, on June 16, 2022: Since the beginning of the year, the S&P 500 has experienced a 24 percent decline, with just two percent of stocks sitting above their 50-day moving average.

The greatest paradox: What do we make of this information? As author Charlie Bilello states, “The greatest paradox in markets is that both extreme oversold and extreme overbought conditions tend to be followed by above-average returns.” How? It draws down again to fear and greed. Momentum from extreme highs and mean reversion from extreme lows create the “most powerful forces in markets”, prompting above-average returns.

Take heed: Now is a good opportunity to take advantage of an oversold market, whether that be through deployment of cash, rebalancing, tax loss harvesting or Roth conversion. It should also be noted that the market can still take extended periods of time to truly recover, and a sound plan can help provide you that time.