The accompanying charts illustrate the power of the indicator. The one on the left shows recent low readings of the index. In August 1998, for instance, bulls accounted for just 17 percent of those polled, the smallest proportion in the past six years, reflecting worries about the financial turmoil occurring overseas at the time. Similarly, the 20 percent bullish reading in October 1999 coincided with fears about Y2K and an overvalued market. Identifying an extreme as it is occurring is more difficult.
Pessimists can always become more gloomy and optimists more rosy.
One way to avoid calling a market bottom prematurely is to wait until the percentage of bulls has crept back above 30 after one or more readings below this level. At that point, it is likely that pessimistic sentiment is exhausting itself. Conversely, a reading above 70 is a sign that market expectations have become relatively high and a correction or consolidation may be in order. Perhaps more important is to read the sentiment indicators in the context of technical analysis. Note that since 1995, no monthly close has dropped below either of the averages, which may thus be identified as technical support levels.