The Smart Money Is Preparing for a Correction [Dow Jones Industrial Average, Microsoft Corporation]

market correctionIf you want a great stock to invest in, you should buy Crystal Ball Inc. (NYSE: BS) because it appears that in the past few weeks everyone on Wall Street is using one and they’re all saying there is a big correction coming.

For the record, if you didn’t get the joke, there is no stock called Crystal Ball Inc. I don’t want any angry emails saying you couldn’t find the stock.

Now, at Investment U and The Oxford Club, we don’t predict which way the market is going to go. We’re not market timers.

But recently, many Wall Street strategists and technicians have pointed to all kinds of signals that suggest the market is about to sell off.

Here are some of the reasons that they are pointing to for why the market should correct.

Small Caps Not Participating

Although the Dow and the S&P 500 hit new highs last week, the Russell 2000, an index of small caps, hasn’t seen a new high since early March and is currently more than 8% below that high.

Usually, small caps lead advances. The argument is that the broad market rally is unsustainable without small caps.

Additionally, there is a statistic getting a lot of buzz in financial circles that the last 35 times the Russell fell 10%, the broader market declined by the same amount. The Russell 2000 hit that 10% down mark just two days after the S&P 500 tagged a new all-time high. Will the S&P follow and make it 36 times in a row?

On Monday in an excellent column on small caps, The Oxford Club’s Matt Carr wrote, “When small caps struggle – and retreat quickly – it’s often a reason for pause because it might be a sign the companies at the frontlines of the U.S. economy are firing off warning flares of a larger problem.”

Skittish investors who are worried about the economy could see the small cap sell-off as proof that the economy is not getting traction, which could push all stocks lower.

The Smart Money Is Nervous

One of the most interesting arguments supporting a sell-off has to do with the so-called “smart money.”

The Bloomberg Smart Money Flow Index (SMFI) tracks the Dow Jones Industrial Average minus the first 30 minutes of trading each day. The theory is that most buying and selling in the first 30 minutes is conducted because of emotion. That’s the “dumb money.” The smart money waits until things have settled a bit and then gets to work.

So when there’s a lot of selling early in a trading day, the SMFI will have an upward bias and vice versa if much of the day’s buying came in the first half hour.

Ari Wald of Oppenheimer said, “Trouble usually lies ahead when the

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