Prepare For An S&P 500 'Summer Swoon'

Includes: IVV, SPY
by: Avi Gilburt

Many of you know me for my articles that I write on Seeking Alpha in the precious metals market. While it has been quite some time since I have written about the S&P 500, I think we are approaching an important enough inflection point to warrant an appropriate warning to Seeking Alpha readers.

For those that know my analysis, I base all my market calls upon market sentiment, which is supported by Elliott Wave analysis and Fibonacci mathematics, while I attempt to back it up with supporting technical indicators to make certain that my analysis is correct.

There are many indications currently that sentiment is at some of the highest levels we have seen in many years. Jason Goepfert of has been showing that investors are becoming very highly leveraged once again in order to own stocks. This is usually not a signal for long term health for the stock market, as it shows that sentiment is quite high for stock ownership. Furthermore, the Rydex funds are also showing extreme levels of optimism, along with several other readings across markets which are evidencing extreme confidence among investors that the markets are going to continue their run.

Unfortunately, when the boat becomes heavily weighted on one side, we usually know the outcome. And when it is heavily weighted on the long side, the outcome is usually not very pretty for those holding stocks on the long side.

But, the decline we began last week will set up another rally taking us into June. I would highly suggest that investors take that opportunity to lighten up on their long positions, or at least hedge their long positions into the next rally.

My target region for the next rally into June is between 1706-1712 in the S&P 500, and depending on the manner in which we do rally, I will even be watching for evidence we may come up short. But this next top I am expecting in June will likely set off a larger correction which can take the S&P 500 all the way down to the 200DMA which will likely be in the low 1500 region by the time we encounter that moving average in late summertime.

Yes, I know it may sound a bit extreme to claim that such a strong market will see a strong and large decline. But, the majority is never able to see a market swoon before it occurs. Rather, just before a market correction occurs, everyone is convinced in the invincibility of the market. Based upon the sentiment indications, sentiment is truly high enough at this time to support a sizable market pullback.

As for the longer term, as long as the 1500 region is held as support, I am seeing another rally taking hold in the fall of 2013, which should last into the end of the first quarter of 2014. Once that rally has completed, the health of our stock market may be placed in serious question, as the potential for a market crash akin to what we saw in 2008 will be greatly increased.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.