The stock market appears to be in the early stages of correcting. The market's technical analysts are telling us to beware of market action in the next several weeks. This concern has been generated by the action of the Advance/Decline (A/D) line, which has been turning down for the past two weeks. In other words, it's getting harder and harder to find stocks that are going up in price.

This doesn't mean stocks will drop in a panic mode, but it does mean that over a period of several weeks, odds favor a majority of stocks to lose money. Market analysts have performed a technical check-up of the market. They check the A/D line, Price to Earnings (P/E) Ratio, the Relative Strength (R/S) of stocks or sectors and the market's Moving Average (M/A). If the majority of these indices are bearish, analysts start to issue warnings.

As a money flow analyst, I watch all of these indices with one notable addition-money flowing into and out of every aspect of the market and our nation's economy. When you know the extent of accumulation versus distribution, you not only know the direction of the market, but you know the extent of its momentum. Instead of just knowing that a majority of stocks are moving one way or another, you know to what extent these stocks are moving up or down. The price moves of a stock are often deceptive when it comes to telling you market direction. Money flow is much more accurate.

Of course, nothing is perfect, but money flow analysis provides a greater chance of winning. The technicians' bag of tricks provides the direction of a market move. Money flow provides the unfolding picture of the momentum that's building in the index, the sector, and the stock.

For the past two months, I have been concerned about the excessive outflow of money from our economy. My best educated guess is that billions of dollars have been fleeing our economy to avoid what some wealthy Americans perceive as being taxed too much. When you couple this loss with bankruptcies and debt default, there has been less money flowing into the economy.

What does this mean to our bottom line? There are a growing number of Wall Street analysts making bearish comments regarding the near-term future of this market. They are downgrading some stocks and saying that the market could correct between 10% and 30% over the next several months.

In the past, the market would usually warn us that it was about to correct-short-term interest rates would usually move up to close the gap between the short-term rates and the 10-year bond. For example, the main reason the market collapsed in 2000 was the drying up of liquidity (cash flow). It appears the Federal Reserve doesn't want to chance raising rates. An interest rate increase, of any extent, could do serious harm to the economy for the longer-term.

What can we do about the potential market correction? Monitor your investments closely. Keep a close stop-loss point in place and be prepared to sell if that point is reached. Slow your buying to a select few stocks with good money flow momentum. Check out the stocks listed in my 21 Small Caps portfolio (page 12 of Kenneth Coleman's Investment Tracker newsletter) and the portfolios on this website.

Kenneth Coleman