When price loses its way: an analysis of market extremes
October 27, 2026
By Oscar Tejada
Financial markets reflect the theoretical value of a specific asset; that is, we cannot understand it as its actual value. This consensus reflects the expectations of millions of investors about what will happen in the future. Under normal conditions, the price incorporates publicly available information about earnings, interest rates, risks, and economic conditions. However, in times of tension or euphoria, this mechanism can become distorted and dominated by fear, greed, the urge to sell, or self-reinforcing narratives.
A recent example can be seen in the US Treasury market. After the escalation of the conflict between the United States and Iran, the yield on the 10-year US Treasury bond rose from 3.95% to a high of 5.36%, before falling back to around 5% in just a few trading sessions. This movement shows how markets can overreact when uncertainty increases and investors anticipate still poorly defined scenarios.
Price and value are not the same.
A sharp price fluctuation does not necessarily imply irrationality. A war, a pandemic, a bank failure, or an unexpected change in monetary policy can alter expected profits, increase risk, or change interest rates. When interest rates rise, for example, the profits a company will earn many years from now are worth less in current terms. This is why growth companies tend to react particularly strongly to changes in monetary policy.
The problem arises when prices go far beyond what the new data would justify. Valuation is also not an exact figure: it depends on assumptions about growth, inflation, margins, and risk. And that is why, in times of uncertainty, these assumptions (those of each of the market participants) diverge.
Why Markets Exaggerate
The most obvious explanation lies in human behavior. During a prolonged rally, recent success becomes an investment argument: if an asset has risen, it seems it will continue to do so. The herd effect reduces the psychological cost of being wrong, and the fear of missing out drives new purchases. At such times, the story the market tells can end up carrying more weight than fundamental analysis. The price rises because investors believe in a particular narrative, and that very rise reinforces its credibility.
During declines, something similar occurs, although usually more violently. The fear of losing money, the search for liquidity, and uncertainty about the decisions of other participants trigger accelerated selling. Many investors don’t sell after carefully recalculating an asset’s value, but rather because they fear further losses, need cash, or are forced to reduce risk.
The important observation is not that every decline will produce an immediate rebound, but that extreme optimism and pessimism can drive prices to levels that are difficult to justify with the available information.
When Market Structure Amplifies the Movement
Emotions are not the only explanation. The financial architecture itself can amplify movements that were initially reasonable. Leverage forces some investors to sell when the value of their collateral decreases. Open-end funds must generate liquidity to meet redemptions. Certain risk management models automatically reduce exposure when volatility increases. Furthermore, many systematic strategies react similarly to the same signals. These decisions may be rational on an individual level. However, when thousands of participants act simultaneously, the outcome can far exceed what the fundamentals would justify.
Liquidity also plays a decisive role. Under normal conditions, there are buyers willing to absorb the selling pressure. In times of stress, that capacity can disappear. Sellers are forced to accept increasingly lower prices, and the market enters a self-reinforcing cycle: the drop generates new sales, and these, in turn, cause further drops.
From Tulips to Meme Stocks
The tulip mania of the 17th-century Netherlands is considered one of the first documented speculative bubbles. Tulips, introduced to Europe a few decades earlier, had become prestige goods. Some rare varieties, especially those with striking color patterns, reached extraordinary prices due to their scarcity.
Speculation intensified between 1636 and 1637. Contracts were being negotiated for bulbs that had not yet been delivered, and many buyers did not intend to cultivate them but rather to resell them quickly at a higher price. Some transactions assigned values to certain bulbs comparable to the price of a house. By early 1637, several auctions failed to attract buyers, and confidence crumbled. Prices plummeted, and numerous contracts were left in dispute. The episode primarily affected specific groups of merchants and did not cause the collapse of the entire Dutch economy, as is sometimes claimed. Even so, its lesson remains relevant: when the expectation of selling at a higher price replaces the analysis of the underlying economic value, prices can become disconnected from reality for a time.
Centuries later, the tech bubble of the late 1990s displayed a similar pattern. The internet was a transformative innovation, and many companies were expected to change the global economy. However, expectations reached such high levels that numerous companies traded at valuations impossible to justify. More recently, meme stocks, with GameStop as the most well-known example, have shown how social media accelerates these processes. They didn’t create the speculation, but they facilitated the coordination and dissemination of narratives.
War, Rumors, and Headlines
Geopolitical events are especially complex because they combine information with extreme uncertainty. A conflict can affect energy supplies, increase inflation, or worsen the economic outlook. It’s logical that markets react. However, the first hours or days are usually marked by incomplete information. Investors not only assess the most likely scenario but also the possibility of much more serious events.
When these extreme scenarios fail to materialize, some of the movement corrects itself. The trigger was real, but the initial reaction was exaggerated. Added to this is the speed at which information circulates today. Rumors, headlines taken out of context, or fake news can spread faster than subsequent verification. Technology accelerates these movements, although ultimate responsibility remains with humans.
How to Analyze an Extreme Market Move
When faced with an exceptional rise or fall, it’s helpful to ask four fundamental questions.
The first is what has changed in the economic outlook or expected cash flows. The second involves assessing how interest rates and risk perception have changed. The third seeks to identify technical factors, such as forced selling, leverage, or liquidity problems. Finally, it’s important to distinguish how much of the movement is based on verifiable facts and how much on narratives that are difficult to confirm.
This approach doesn’t allow you to accurately predict market lows or highs, but it helps differentiate information from emotion.
Markets will continue to experience episodes of euphoria and panic because they incorporate human expectations, and human beings are not entirely rational. The investor’s advantage lies not in predicting the next extreme move, but in distinguishing between a real economic shift and its financial amplification. When the market deviates too much from fundamentals, valuation discipline, diversification, and liquidity management remain the best tools to avoid buying out of euphoria and selling out of fear.