To print article, click Print on your browser's File menu. Go back Posted 5/5/2000 Kenner & Niederhoffer What's next for Wall Street	sponsored by: Extra! Comeback for heavyweights after a bruising week The 'Down 35' have climbed back into the ring despite the broader markets' fake-outs, rumors and dips. Plus: 20 battered stocks that insiders are buying. By Laurel Kenner and Victor Niederhoffer Interest rates, in the "Devil's Dictionary" of market terms by reader Don Staricka, are defined as "an all-purpose explanation for whatever happens." The definition fit perfectly this week. The market's backing and filling were interpreted as concern over what the Federal Reserve Bank might do. Another of Staricka's key definitions is "stop loss," which he describes as the point your stock drops to when you sell before it turns around and goes up sharply. The two definitions are not unrelated, as this week's market action illustrates. The mistress of markets pulled out almost every deceptive technique known to mankind in an effort to shake longs out of their positions. Money Plus. Easy online tools and free Bill Pay, too. Late Monday, rumors circulated that the central bank's Federal Open Market Committee would raise rates by 50 basis points at its May 16 meeting. On Tuesday, the mistress played dead, then startled investors with a heart-stopping decline. By Wednesday, Monday's rumor had built to 50 basis points before the FOMC meeting plus another 50 basis points at the meeting. The market went into a disruptive performance that recalled the April 4 scenario where the Nasdaq Combined Composite Index ($COMPX) fell almost 10% and then bounced back to close unchanged. On Thursday, there were horrible feints up and down, ending in a standstill. Finally, on Friday, an almost lethal opening of down 2% gave way to a 5% rally from the low. The mistress was successful in scaring many predators. But to put things in perspective, note that even after the evil mistress' terrible deceptions, fake-outs, decoys, lures and what have you, the three major stock averages ended the week down a mere 1%. Kenner & Niederhoffer Victor Niederhoffer has traded stocks, currencies and futures worldwide for the past 40 years; he is the author of "The Education of a Speculator." Laurel Kenner is a trader and former Bloomberg markets editor. In a special series of weekend columns for MoneyCentral, they'll assess the past week's Wall Street performance and next week's prospects. Let us know what you think in the Start Investing Community. Bonds, though, were a different story -- as the week saw one of the most-severe declines ever. Bond futures dropped five straight days, with a net decline of about three points. Over the last 10 days, the 30-year Treasury has lost more than five points, sending the yield up from 5.83% to 6.18%. Was all this action bullish or bearish? Looking through the 24 most similar jumps in yield over the last six years, we note that this scenario turned out to be bullish over the following two weeks for stocks. The average move up was 2%, and the odds of a rise were about 3-to-1. Thus it seems that periodic rises in yield in the past half-decade have failed to keep stocks from rising. And we expect that will be so this time as well.
The Education of a Speculator Sponsored Link: Check out The Education of a Speculator at Barnes & Noble.	Stocks to buy while they're down We are humble market columnists. As we have said repeatedly, the market is too dynamic, too changeable, too complex and too specialized for any two people -- even two with a combined 100 years of experience -- to encapsulate properly. But by tapping into your tastes, your abilities and your know-how, we hope to be able to deliver something current and valuable. Please keep sending feedback for our mutual benefit; see the e-mail link below. We also learn from our editors. Jon Markman, upon seeing drafts of our work, always queries us, "Yes, but what individual stocks can you recommend to our readers right now as a result of your analysis?" We always demur with a "We don't know." But he has challenged us, and we have been making strides in answering that question. Our first effort in that direction was our index of Down 35 stocks, those that fell below $100 after trading above $200. We hypothesize that they will come back. Big beasts like elephants and hyped stocks tend to come back along the same path that they trampled in the first place. At least that's what Bata Lobagola, the British-educated native of Dahomey observed in the jungle he lived in, and our reading of the elephant literature confirms that this is true. The Down 35's performance from April 27 through May 4 was an 8% gain, beating the 1.43% decline in the Nasdaq Composite. Since we introduced the list, it is up 17.1%, compared with 2.10% for the Nasdaq. We expanded the list to 35 from the original 31 last week. Down 35  Stock   Pre-Crash   High   Crash Low   % Decline   % Chg   4/27-5/4   % Chg   4/20-5/4   Avanex (AVNX) $273.50  $121  83  -19  99   Aether Systems (AETH) $345  $62  82  14  47   Terayon Comm. Sys. (TERN) $285.25  $56  85  38  45   Human Genome Sciences (HGSI)  $232.75  $50  79  42  43   Medarex (MEDX) $206  $33.25  84  32  41   Emulex (EMLX) $225  $35.50  84  33  35   Virata (VRTA) $222  $57.13  74  -6.9  32   Affymetrix (AFFX) $327  $84.63  74  23  29   Protein Design Labs (PDLI) $338  $51.81  85  26  28   E-Tek Dynamics (ETEK) $315.13  $133  72  -2.7  27   E.piphany (EPNY) $324.88  $43  87  33  26   Abgenix (ABGX) $206.50  $51.83  75  30  25   Rambus (RMBS) $471  $47.38  62  -3.3  22   QLogic (QLGC) $203.25  $52  74  -0.5  21   FreeMarkets (FMKT) $370  $39.50  89  -5  17   Phone.com (PHCM) $208  $50  76  6.5  15   Inktomi (INKT) $241.50  $89.88  63  -1.8  14   Akamai Technologies (AKAM) $345.50  $56.63  84  17  12   Powerwave Technologies (PWAV)  $205  $81.50  60  -6.7  11   VeriSign (VRSN) $258.50  $91  65  2.8  9.6   Xcelera.com (XLA) $225  $50.06  78  2.5  9.3   Infosys Technologies (INFY) $681  $131.13  65  -0.7  7.7   Network Solutions (NSOL) $255.63  $96.94  62  1.5  7.6   Ventro (VNTR) $243.50  $21.75  91  17  4.6   webMethods (WEBM) $336.25  $44.50  87  -2.1  4.58   Incyte Pharmaceuticals (INCY) $289.06  $57  80  13  4.4   Commerce One (CMRC) $275.63  $58  76  -6.3  2.3   i2 Technologies (ITWO) $223.50  $69  69  -7.8  1.5   Micromuse (MUSE) $206  $50.06  68  3.5  1.2   Genentech (DNA) $245  $97  60  8.3  -0.2   Juniper Networks (JNPR) $312.94  $151.50  52  -12  -1.7   Qualcomm (QCOM) $200  $98.13  54  3.1  -2.6   Interwoven (IWOV) $200  $41.63  79  3.8  -7.2   Internet Capital Group (ICGE) $200.94  $30.25  85  -1.7  -9.6   MicroStrategy (MSTR) $333  $26.13  94  6.1  -22   Average % Change       7.99  17.1   Nasdaq Composite       -1.4  2.1  What the insiders are buying We turn now to a group of stocks that also has potential to rebound -- beaten-down stocks that insiders are accumulating. The reasoning here is that insiders -- officers, directors and major shareholders -- often have much of their wealth, income and perquisites directly tied up in their stocks. If they have the courage to put even more of their eggs in this basket, then chances are the prospects aren't too bad for a recovery. The idea is based on some research that Vic did with James Lorie in 1966, published in the Journal of Law and Economics. The gist was that substantial buying by insiders was predictive of superior performance. This finding has been verified often over the last 35 years. The best current book on insider trading is H. Nejat Seyhun's "Investment Intelligence from Insider Trading." His work involves a complete enumeration of trades on NYSE, Amex and Nasdaq companies from 1975 to 1996. He concludes: "For the 12-month period following the reporting of insider transactions, buys outperform the market index by 2% and sells underperform by 3%." Insiders are required to disclose buying and selling within 10 days of the end of the month in which the trade took place. Our own system uses only stocks that have had big declines, where insider trading might be particularly indicative because it takes great courage to throw good money into the fray when much of your chips and future emoluments are in one basket. We choose the stocks from the standpoint of a fly on the wall at that time, rather than using the retrospective selection that ruins so much of market-system work. We found that these companies outperform their peers by about 10 percentage points a year. Our uncertainty as to whether this represents a true difference or is merely due to random variations is about 5%, and this borders on the usually used criteria for accepting a difference as real. However we warn that the individual returns of the companies can be expected to vary a lot, and the relative superiority or inferiority of the stocks selected varies considerably from quarter to quarter. Finally, the caveat that applies to all systems: Cycles change. As Robert L. Bacon put it in his classic "Secrets of Professional Turf Betting," "The public wants to hit on some simple key, shown by numbers in the past performances, and use this key to get richer and richer as racing goes on. Few players take into consideration the principle of ever-changing cycles of results." As the public gets wise to the winning ways of a system and puts their money on it, Bacon wrote, payoffs decrease. Our current selection of 20 stocks focuses on medium-sized companies that declined at least 25% in the first four months of the year and where the last insider trade was a buy that took place in February, March or April. Only one is traded on the Nasdaq -- Nasdaq 100 member Visx (VISX, news, msgs). (By the way, the ratio of insider sells to buys on the other 99 companies in that index in the past three months was on the order of 50:1.) We present the Insider 20 as another portfolio of stocks that can be bought now -- as a group, not individually. We will report on their progress in coming weeks. Insider 20  Company   % Chg   12/31-4/30   Last   Insider Trade   Visx (VISX) -69   Feb. 25, 2000   Finova Group (FNV) -64   March 31, 2000   Cambridge Technology (CATP)  -58   March 9, 2000   Sykes Enterprises (SYKE) -54   Feb. 14, 2000   Modis Profess. Svcs (MPS) -47   April 26, 2000   Express Scripts (ESRX) -44   Feb. 17, 2000   Dial (DL) -43   March 15, 2000   AK Steel (AKS) -41   March 22, 2000   Dean Foods (DF) -38   March 24, 2000   Airgas (ARG) -38   March 9, 2000   Federal-Mogul (FMO) -33   March 16, 2000   Standard Register (SR) -33   Feb. 25, 2000   H.B. Fuller (FULL) -31   May 1, 2000   Interstate Bakeries (IBC) -30   Feb. 29, 2000   Keystone Financial (KSTN) -29   March 6, 2000   Storage Technology (STK) -29   Feb. 18, 2000   Natl Commerce Bancorp (NCBC)  -28   April 7, 2000   Carpenter Technology (CRS) -27   April 25, 2000   Saks (SKS) -27   March 9, 2000   Ucar International (UCR) -26   March 3, 2000  Mail Laurel and Victor at lkvn@hotmail.com. MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.