In a volatile year like 2025, technical indicators have become indispensable tools for decoding investor sentiment. One of the most widely used is the percentage of overbought and oversold stocks, typically based on RSI or similar momentum oscillators. The chart above provides a snapshot of these indicators within the S&P 500, revealing powerful undercurrents that may signal either market overheating or potential reversals.

Latest Reading: Market Heating Up or Poised for a Pullback?

As of mid-June 2025, 32.4% of the stocks in the S&P 500 are in overbought territory, while only 22.6% are considered oversold. This balance points to a market that is tilting toward excessive optimism. The trend has shifted significantly since the first quarter of the year, when oversold levels surged above 70%, reflecting broad-based selloffs.

The key question now is whether investors are fueling the early stages of a sustainable rally—or whether we’re nearing a technical ceiling that could trigger a correction.

Reversal Points: Tracking the Emotional Pivot of the Market

Over the past 12 months, the S&P 500 has experienced dramatic swings in sentiment. July, October, and December 2024 were marked by violent shifts between overbought and oversold extremes, often triggered by macroeconomic surprises, earnings revisions, or Federal Reserve announcements.

These transitions reflect a key psychological dynamic: when over 50% of stocks hit extreme technical readings in either direction, the market is likely reacting emotionally—either in fear or in exuberance. These moments often coincide with inflection points in broader market trends.

Historical Context: Can OB/OS Data Predict Market Turns?

Historically, OB/OS (Overbought/Oversold) indicators have functioned as leading signals ahead of major market shifts. In September 2023, for instance, more than 60% of S&P 500 stocks were overbought just prior to a sharp correction. Conversely, in January 2024, when oversold levels reached nearly 70%, value investors rushed in to capitalize on bargain prices.

While not predictive on their own, these indicators can offer important context when cross-referenced with macro trends, earnings cycles, and investor flows.

Monetary Policy Matters: The Fed’s Role in Technical Extremes

It’s important to note that OB/OS readings don’t exist in a vacuum. They’re heavily influenced by the broader monetary environment. During tightening cycles—such as in early 2025—investors tend to panic more quickly in response to volatility, pushing more stocks into oversold zones. On the other hand, in dovish or easing environments, stocks can remain in overbought conditions for extended periods without correction.

Overlaying technical indicators with rate forecasts, inflation expectations, and bond yields provides a more holistic picture of market dynamics.

Sector Divergences: Not All Stocks React the Same

While the chart aggregates the entire S&P 500, OB/OS behavior varies drastically across sectors. Tech stocks, for example, frequently enter overbought territory amid AI-driven rallies or post-earnings surges. Conversely, utility and consumer staples stocks may fall into oversold zones during broader economic uncertainty, even if their fundamentals remain stable.

For investors seeking alpha, disaggregating OB/OS data by sector can reveal asymmetric opportunities—especially when market sentiment skews across industries.

Caution: Why OB/OS Shouldn’t Stand Alone

Despite their popularity, overbought/oversold indicators have limitations. Markets can stay “too hot” or “too cold” for much longer than expected. OB/OS spikes, especially during momentum-driven cycles, don’t always precede reversals. That’s why institutional managers often pair them with complementary tools like RSI divergence, MACD signals, moving averages, or money flow metrics.

Used properly, OB/OS is a valuable timing tool—but it’s no substitute for a broader risk framework or fundamental analysis.

Final Thoughts: A Psychological Roadmap for the Market

The OB/OS chart isn’t just a technical tool—it’s a window into market psychology. It maps the collective emotion of institutional and retail investors alike: fear, hope, greed, and capitulation. And as we enter the second half of 2025, the dominance of overbought conditions suggests a market walking a fine line between breakout and burnout.

For tactical investors, this may be the time to trim exposure or rebalance portfolios. For long-term strategists, it’s a prompt to monitor sector-specific anomalies and watch for confirmation signals. Either way, ignoring this indicator now could mean missing the next major move—up or down.