Those readings can remain extreme for quite a while
We've been discussing the Rydex numbers for the last few weeks at the E-wave board, where some of the posters there have been noting the same points you mention.
But although any good trader shouldn't ignore sentiment readings, it's important to note that levels of bullishness or bearishness can stay that way for weeks at a time, and therefore I use them a secondary or tertiary indicator.
Here's a short quip on the topic from Chartcraft:
"Bullishness or Bearishness can persist for a long time and extreme readings need to be confirmed by other technical indicators. The peak in Bearishness can also precede the actual top or bottom by a long time. In the 1981-82 Bear Market the peak reading for Bears was 60.9% on 3/26/82, about 4 months before the actual market low in early August. By the time of the August lows the Bears were just over 40% and some advisors used the 20% drop in Bears as evidence to stay Bearish. But not us, our technical indicators were screaming buy and we went 100%invested just before the lows.
At end of 1994, we had two weeks in a row of 59% Bears as part of a streak of 45 weeks in a row of more Bears than Bulls. We also had a record number of selling climaxes that month and, again, our technical indicators were screaming Buy and we jumped in with both feet."
Message 17615431
The Rydex numbers don't seem to be as precise an indicator as other indicators such as the $VIX, for example, where an intraday reading over 50 has marked a couple of intermediate term bottoms over the last two years. I'll be watching that indicator more closely than the Rydex numbers in the coming weeks.
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