Watch the Insiders

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When the average

New York Stock Exchange

stock declines 25%, you know you have to start looking beyond the nifty 50 for some buy ideas. For some of you, particularly you institutional types, anything beyond the favored few might be booby-trapped. You don't know which stocks deserve to be down 25% from inflated levels, and which ones are headed down 50%.

I've got the answer: Watch insider buying. For much of the last five years stocks haven't had such startling declines. So we haven't seen many executives take advantage of dips in their stocks to buy. In the market. Outright.

You hardly ever see large-cap insider stock-buying, because most execs have such good option packages that they never need to buy. They get stock anyway for free. They only sell.

But that's not the case with the rest of the unwashed. Many companies have very stingy option grants and if execs want to own stock they have to go buy it. They don't buy off the 52-week-high list as momentum mutual funds do. These folks aren't into the 200-day moving average or the advance-decline line or

Barton Biggs'

Death Watch 2000. They are into making money. They could take their savings and do a bunch of different things with it, but they only buy stock for one reason: They think the stock is going higher.

I haven't paid much attention to insider buying and selling these last few years. In fact, I have railed against it, noting in a piece back in

SmartMoney

a few years ago that you would have sold a massive amount of

Cisco

(CSCO) - Get Report

and

EMC

(EMC)

-- two real winners -- if you had followed insider selling too closely. (Of course, insider selling can be the key to getting out ahead of a fraud, but that's not easy, either.)

But there was a time when I was mesmerized by insider buying and it made me a fortune. I noticed an amazing pattern in 1994 and 1995 among executives of small- and mid-sized banks and savings-and-loans of massive accumulation of their own stocks. Talk about prescient buying. You could not have been more right than these guys.

Now this group has been wrecked, with many savings-and-loans at their 52-week lows, trading reasonably to book value at a time when the large banks are finished making their giant mergers and now just want to do fill-ins. These guys are the fill-ins. I speak to these types of execs all of the time. They are startled and humbled about how far and how fast their stocks have fallen. Some of them have massive prepayment risk because of the way the yield curve is structured. (In other words, people are refinancing their mortgages.)

But many of them don't. And some of them are doing fabulously, exceeding estimates handily. To a person they all claim to be buying their stocks. I want to wait and see the filings. If they are buying, I am buying. They know their businesses better than anyone. Maybe this could be '94-'95 all over again, with 100% to 200% returns ahead.

Of course, the declines haven't been limited to just financials. There are massive selloffs in basic industries, metals, aerospace and anything oil and gas. Again, I will scrutinize the insider buying here.

We have heard over and over again that there is no value in this market. That's just plain wrong. In fact, a shocking number of stocks are incredibly undervalued, if you use a

BetzDearborn

(BTL)

measure (the company got a bid Thursday about 100% above what it was selling for).

We just need help in finding the undervalued ones. Insider buying is one signal that can help. That's what I will be riveted to now that this reporting season has run its course.

(

CDA/Investnet

data is available free on

TSC

as part of our

Thomson Company Reports

.)

Random musings

: A signal that I trust that says the market is too oversold to go down is the difficulty you encounter in selling puts. Yesterday morning I was trying to sell some puts on a couple of Internet offerings and bam, nobody would buy them. I had to force them. No wonder the stocks just exploded. They were way oversold. Sustainable? What do you think, I work at

Forrester

? I have no idea. I remain loyal only to a handful of guys who make money. You can have the rest. ...

Globex

futures are a real quandary. When I came to work this morning, the early line was pretty flat; now they indicate a massive down market. Here's what I want to know: Who is trading these and why are they doing it so sloppily and stupidly? I know Europe got weak later in the day, but the illiquidity of these Globex futures means that a small amount of money can knock the market down big and do a lot of psychological damage to those who walk in early. I debated this issue with my trader

Mark Kantor

this morning, as we are early birds always ready to trade. We figure that some short with a couple hundred g's to spare could take this Globex market down huge, causing a massive amount of worry and panic. I know, that is a mite conspiratorial, but I know that I can't move 5,000 shares of any one stock until 7:30 a.m. EDT (24-hour trading is a total fiction, just so you know), so why should I believe that someone can move a huge amount of futures at this hour? Unless they wanted to knock the market down.

James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com.

At the time of publication the fund was long Cisco and EMC, though positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at

letters@thestreet.com.