When a population is partially protected from fluctuating selection, as when a seed bank is present, variance in fitness will be reduced and reproductive success of the population will be promoted. This study further investigates the effect of such a ‘refuge’ from fluctuating selection using a mathematical model that couples demographic and evolutionary dynamics. While alleles that cause smaller fluctuations in population density should be positively selected according to classical theoretic predictions, this study finds the opposite: alleles that increase the amplitude of population size fluctuation are positively selected if population density is weakly regulated. Under strong density regulation with a constant carrying capacity, long-term maintenance of polymorphism caused by the storage effect emerges. However, if the carrying capacity of the population is oscillating, mutant alleles whose fitness fluctuates in the same direction as population size are positively selected, eventually reaching fixation or intermediate frequencies that oscillate over time. This oscillatory polymorphism, which requires fitness fluctuations that can arise with simple trade-offs in life-history traits, is a novel form of balancing selection. These results highlight the importance of allowing joint demographic and population genetic changes in models, the failure of which prevents the discovery of novel eco-evolutionary dynamics.