The market acts like a pendulum, swinging between extremes of optimism and pessimism. Investors often overreact, either celebrating good news or obsessing over bad news, which results in assets being overvalued or undervalued. This cycle repeats constantly, with the market spending more time at extremes than in a balanced middle.

When prices suddenly drop, it’s often due to a shift in perception rather than actual changes in market conditions. Investors tend to focus on either positive or negative aspects depending on the prevailing sentiment, which distorts their interpretation of events. During optimistic phases, they see only the good and ignore the bad; when sentiment turns negative, the reverse happens, leading to sharp price swings.

A great way to gauge the market's strength is by observing its reaction to significant news that contradicts the current trend. In a strong market, even major negative news is downplayed or absorbed with minimal effect, while in a weak market, even minor news that goes against the trend can provoke an overreaction. This response acts as a barometer for the market’s underlying strength or vulnerability.