ICN Plunges 26.5% as Speculators Sell Holdings : * Stocks: Buyers had been squeezing investors who had ‘shorted’ shares, traders said. Many apparently decided to take profits.

The stock of ICN Pharmaceuticals plunged 26.5%, or $4.375 a share, to $12.125 in heavy trading Friday, a day after the New York Stock Exchange took the extraordinary step of forbidding brokers to activate automatic sell orders.

Such orders, known as stop orders, are instructions to brokers to automatically sell a client’s stock when it falls below a certain price. Investors often issue them to prevent precipitous losses in the event of a sharp decline in a stock.

The exchange’s move comes after two weeks of volatile trading in ICN, a holding company whose units are involved in drug research, testing and marketing. ICN was the exchange’s biggest percentage loser Friday. Before the drop, its stock had doubled in two weeks to $16.50 a share.

An NYSE spokesman would not say what prompted the exchange to take such an unusual action in the trading of Costa Mesa-based ICN. The company is unaware of any reason for the stock’s recent activity, ICN spokesman Jack Sholl said.

But analysts said a large number of the company’s shares were sold short recently. A short seller borrows shares expecting their price to go down. He sells them at the current, higher price, then makes a profit by replacing them at a lower price when the stock falls.

About 1 million of ICN’s 11.7 million shares outstanding were held by short sellers a few weeks ago.

When the price of a stock goes up, short sellers are forced to buy to limit potential losses. That surge of buying--called a “short squeeze”--pushes the price up still further.

That’s what’s been happening recently to ICN stock, said Mark Matheson, research director at Newport Beach investment banker Cruttenden & Co., one of the few analysts who follows the stock.

In fact, Matheson touted the stock in a Tuesday report to clients, saying “there is a large short position that could be squeezed.”

By Thursday, as the stock continued to skyrocket, Matheson was telling investors that they should sell some of their shares and take a profit.

People who bought the stock should wait to see if ICN’s future earnings justify the higher stock price, he told Dow Jones Professional Investor Report Thursday.

“The stock went too far, too fast,” he said Friday.

By Friday, short sellers were reassured by a company statement that no big developments were imminent. They pushed the stock back down, said Rafi Khan, an analyst who follows ICN for the Beverly Hills brokerage H. J. Meyers & Co.

“Wherever you have a million short shares out of 12 million shares, the stock is going to go up and down,” said Khan. “That’s part of the game. The fact is the company’s fundamentals remain outstanding.”

Khan last week told his clients to buy ICN. He is still recommending it, he said.