This week I want to tackle two topics: What should an investor do with a stock after bad news comes out, and is insider selling really all that important?

First things first. When it comes to deciding how to react to a downdraft or to a report that insiders are selling shares, the simple truth is that every situation is different. Whether you increase your investment, trim your position or do nothing whatsoever depends on a host of factors, including the size of the position and your risk-tolerance level.

In any case, before actually pulling the trigger, you must also consider whether or not the bad news has already been factored into the share price. Making that judgment is the key to success, of course, and there are no hard and fast answers. Still, there are a few telltale signs I keep an eye out for in each case.

When it comes to judging bad news, value investors know the first thing to do is to turn back to the fundamentals. Does the news mean the entire business is changing for the worse, or is this just a case of a strong story being sidetracked for a bit? Has the market gotten through the panic phase, or is that yet to come? Is the decline picking up momentum that could destroy your investment before you have a chance to reassess, or are you in a good spot to take a step back?

These are important questions, obviously, and every investor might come to different conclusions in the very same case. But I think that looking at these issues can give you some guidelines. Let's take a look at an interesting example of all these trends coming together -- this fall's action in

priceline.com

(PCLN)

.

You see, in the aftermath of Sept. 11, both retail and institutional shareholders were selling priceline like crazy. The stock dropped like a rock, falling from around $5 the day before the terrorist attacks to below $2 the day trading resumed. I don't need to tell you that panic was on everyone's mind after those most horrible attacks in New York and Washington.

But a look at the record shows that investors who had the stomach to buy priceline as it fell made some good money. And even those who bought before Sept. 10 could have gotten back into the black by staying patient and examining the travel industry story. Within three months the stock was back above $5, where it stayed for more than a month.

Looking back, it's now clear that priceline recovered for a couple of reasons, including emerging evidence that travel wouldn't stay as low as you might have feared right after the attacks, and continuing work by priceline's new management to control costs. But even if that wasn't clear then -- and no one knew in September what would happen to the travel industry -- the sharp selling (seven times average daily volume just after resumption) signaled to the smart money to wait it out on the sidelines for a bit.

The big lesson here is that when bad news is released, don't simply follow the crowd and sell your position. Rather, consider that the news may have already been factored into the stock price. And look for future catalysts that could drive the shares higher. In the long run, you'll be happy you did.

Now the question of insider selling. In and of itself, selling by executives and directors says nothing, since share sales can come to help pay tax bills, take profits off the table or diversify, among other reasons.

That said, lots of investors get pretty nervous when they see insiders bailing out of a stock, especially in light of what happened at outfits such as

Enron

and

Tyco

(TYC)

. At those companies, there were plenty of share sales from top execs even as the stock slid sharply -- and in some cases investors didn't even learn about the sales until much, much later.

So lots of value players are probably wondering how to separate the problem insider sales from the routine ones. I look at a few indicators to help me toward a decision: Whether multiple insiders are selling repeatedly, how much a given individual is selling, and whether options are involved. If there doesn't seem to be a stampede for the exits, the selling is often not a sign of bad things to come.

A terrific example of this is

Dial

(DL) - Get Report

. Late last summer, several top execs sold more than 17,000 shares when the stock was trading between $13 and $16. Did they know something that others didn't? Not at all. The sales were either option-related or represented only a small percentage of the insiders' overall holdings. In other words, they were small potatoes and should have been ignored.

The company went on to report several record quarters after these transactions were reported. The stock is trading at more than $20 today.

The lesson: Watch the insiders, but don't jump to conclusions. And stay tuned, because next week I plan to delve back into the mailbag and answer other subscriber questions.

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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Curtis welcomes your

feedback.