Insider Activity Points to More Pain Ahead

It was nice to see a rebound on Friday after the wholesale debacle in the first three trading sessions of the week. We mentioned in past columns that we have been expecting the market to weaken further, but we were definitely not expecting such a violent move downward.

It certainly was not the way we wanted to enter a holiday weekend (the only freedom most of us experienced this Independence Day was from the burden of paying capital gains taxes). But we hope no one brought undue anxiety to the barbecue. Remember what's really important.

The plunge was great news for our recommendations on (USPIX)ProFunds UltraShort and the short on S&P Depositary Receipts(SPY), which we wrote about nearly two months ago.

However, our many long recommendations took it on the chin. We were particularly disappointed at how low Corio(CRIO), Network Equipment(NWK) and Bradley Pharmaceuticals (BPRX) fell. By the time we could have recommended selling them, they already were at a point at which we felt they should be considered good buys again. We are stuck with recommendations on them for now with losses.

Both Corio and Bradley told us there was no company-specific news to blame. Both had quarters that just ended, though, so their freedom to speak may have been impaired. We will be calling them and other companies back next week to see if there's any more information to report.

On Tuesday and Wednesday, we were on the brink of recommending buying into this dip. Cymer(CYMI) and Shaw Group(SGR) would have been the objects of our desire had we actually entered button-pushing mode.

We have been looking for an excuse to recommend getting into Cymer again after initially recommending it last December at $26.51, and being stopped out at $45 as it started down from the $50-plus highs it hit. CYMI broke below $29 on both Tuesday and Wednesday in the midst of the panic, pretty close to where it was last December. The recovery in chip demand may not be around the corner, but one thing is certain: It is seven months closer than it was seven months ago. CYMI was back over $32 on Friday, so we certainly would have looked smart in the short term.

We had been kicking ourselves for not being more concentrated than we are in energy stocks. Insiders called the rebound in that group very astutely last fall, and though our portfolio profited, in hindsight we should have kept with our energy bets longer. Shaw Group was one stock we missed in the group. We had a solid opportunity to recommend it at $21, and missed it. We felt $25 was the highest we would want to enter, but SGR quickly moved up over $30 before we moved. You know what they say about he who hesitates.

When SGR fell below $25 earlier this week, our interest was again piqued. But we weren't able to get hold of management, and we couldn't help but be a bit spooked by the greater-than-average fall of SGR. Another stock in the group that is still on InsiderInsights' Recommended List, Devon Energy(DVN), wasn't down nearly as much. Could there be something more company-specific to cause SGR's plummet? We would need to talk with management to feel comfortable with this stock again, and though we may miss the buying opportunity, we just didn't want to take the risk.

It Could Get Worse, Really

That relates to why we didn't recommend buying into last week's violent dip. We already have a fair amount of skin in the game, and just didn't feel the need to put in more. And with the information we have now, we think the stocks we are already recommending that got pummeled so badly are at least as good as anything else we could add.

So if there are any investors out there sitting on bunches of cash, we think some of it should be trickled in now. But we don't think anyone should be rushing to get fully invested now.

Next week, we'll be looking more closely at the recommended stocks that unexpectedly fell so much more than the market. We think any rebound from the pit of last week will more likely prove to be a good time to take profits than the start of a wholesale upswing in the market. With this view, we may recommend unloading stocks we think haven't lived up to our expectations even if it means taking some losses.

We certainly aren't ready to close out our bets against the market. If last week was the capitulation and the market is about to start a secular upswing, our many long recommendations will do very well. Several indices keep hitting lower lows, however. And although the chart of Insider-Based Market Indicators we present every week in InsiderInsights is finally heading up from the ugly lows it hit in April, it doesn't mean this recent market decline is over.

If history repeats itself, the bottom will be signaled by our Market Indicators rising into bullish territory of 25% (or better still, 50% or more) more companies with insiders buying vs. selling. During the period when the Indicators are rising, however, the market has still tended to decline. And as last week's chart below shows, our Indicators still are far from bullish territory.

A Lack of Faith Insiders are still doing significantly more selling than buying

Source: InsiderInsights.com

More on ArthroCare

In our positive opinion of ArthroCare(ARTC) last week, it seems we were a bit too pessimistic regarding the firm's new plant in Costa Rica. According to Michael Baker, ArthroCare's CEO, the plant is operating ahead of schedule, and is contributing a small percentage of manufacturing volume right now.

ArthroCare expects the Costa Rica plant to begin contributing a significant volume of product in the second half of this year. By year-end, the company expects its gross margin to be 3 to 4 percentage points higher than it was at the beginning of the year. This increase is expected to be entirely due to contributions from the Costa Rica facility.

>To order reprints of this article, click here: Reprints