Three Safer Stocks to Buy As the Market Gets Frothier

2011-09-01 11:32:24 | Source

I don t mean to spoil the party, but the market s dramatic snap-back this fall is starting to look like its on shaky ground. Three things raise some concern  suggesting that the sharp but temporary pullback earlier this week could be a sign of more trouble ahead.

The number of bulls in the market  among market commentators like newsletter writers and brokerage strategists  has risen sharply of late. Bullishness is now at levels normally associated with market tops.
Confidence among  smart money investors  as measured by SentimenTrader.com  has plummeted while  dumb money confidence has moved up sharply. This is another troubling  contrarian indicator which means weakness may lie ahead.
Short interest in NASDAQ stocks recently fell 5.5% compared to last month s levels. Again, this hints that the crowd is getting into rally monkey mode.
None of this proves a huge correction lies around the corner. After all, we are in the midst of the seasonally strong November-April period. It just means its time to be more careful.  With short intensity dropping off so fast, any new long positions must be selected with care, says Phil Erlanger of erlangerresearch.com.

Here s my version of selecting with care: I m going to favor insider buy names where managers are stepping up to the plate after their stocks have been trounced.

Theoretically, at least, this means these stocks will hold up better in an overall pullback  because they ve already been compressed. Going with names like these, however, also means you have to have some patience and buy with a long-term horizon of at least a year or more.

These stocks are damaged goods, after all. So it will take time for management to either repair problems or regain credibility. Here s a closer look at three stocks that have pulled back to levels where insiders see value.

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