The idea
Mean reversion is the tendency for extreme values to move back toward their average. A stock that falls sharply in a few days often bounces; a market valued far above its history tends, over years, to earn lower returns.
Where it shows up
| Time frame | Example |
|---|---|
| Days | An RSI below 30 is often followed by a short bounce |
| Months | Volatility spikes fade. See The VIX (volatility index) |
| Years | Very high market P/E ratios have been followed by weaker returns |
When it fails
Mean reversion assumes the average itself has not changed. If a company's business has permanently weakened, a cheap price is not a bargain; it is the new normal. This is the "value trap". Always ask whether the fundamentals changed before buying a dip.
Momentum versus mean reversion
The two seem to contradict each other, but they work on different time frames: prices tend to revert over days and over many years, and to trend over months. See Momentum investing.
See also
- Momentum investing What price momentum is, the evidence that recent winners tend to keep winning for a while, how momentum is measured, and its crash risk.
- Relative Strength Index (RSI) What the RSI indicator measures, how the 14-day RSI is calculated, what overbought and oversold readings mean, and the limits of using it alone.
- P/E ratio (price-to-earnings) What the P/E ratio means, trailing versus forward P/E, what counts as high or low, and why P/E alone can mislead without growth.
- The VIX (volatility index) What the VIX fear index measures, how it is calculated from S&P 500 options, what VIX levels mean, its history of spikes, and why it tends to mean-revert.
Pages that link here: Frontrunner strategies, The 52-week range, VIX tier allocation
Last updated September 30, 2026. Education only, not investment advice.