Traders who choose to follow our contrarian ripple trading method will be
beneficiaries of a fringe benefit that they are freed from the tyranny of the
“markets going up are good—markets going down are bad” syndrome. It is
typical in the financial press and TV business news to hear talk of a good
day on the market when stocks are up and, in solemn tones, a bad day on
the market when the Dow is down. This view of the markets is shared by
most of the investing public and by professionals as well. It comes about
because most investors and traders are firmly on the long side and, having
bought into their stock positions, they now only feel smart if these go up.

Conversely, they can feel dumb if the stock they bought at $50 goes down
to $48. This view of up equals good and down equals bad is irrational. The

only people who should feel good about a market going up are those who
are fully invested and waiting to sell their positions. For anyone who has
cash and wishes to invest it, a falling market should be a welcome sight.
For most people, however, this is an alien mindset.

By the very nature of our trading strategy and philosophy, we tend only
to be fully invested in stocks following a fairly long period of market weakness
and we are absolutely never fully in cash. As a result, a market moving
up makes us feel good about the fact that we can take profits on some of
the stocks we have bought in recent days. However, a market moving down
also makes us feel good about the purchases that the downward movement
opens up under our method. This even holds true when the market takes
a major tumble, such as that of February 27, 2007. On that day, the Dow
dropped 413 points or over 3 percent, but intraday was showing a loss of
543 points owing to trading-volume-related technical glitches that affected
the computers that calculate and feed the Dow index numbers to market
participants. We are content in such a market pull-back to let our riding
of the ripples pull us back into stock positions where buy signals flash as
those stocks that we have previously sold drop back to the last purchase
price. In the case of the February 27, 2007, market drop, we did exactly this,
ripple trading back into eight stock positions on that day that we had previously
sold in the preceding days or weeks, including one, Weatherford
International (WFT) that we bought, sold and bought back that day. The
one stock we bought that day that was not a ripple trade was Texas Instruments
(TXN). (See the appendixes for details.) Meanwhile, it was positive
news for us that the market was finally making a significant move downwards,
allowing us to ripple trade back into these stocks.

One market scenario that can give us the blahs is the listless one where
the market moves sideways for long periods and stocks in general are going
nowhere, neither up nor down. Luckily this happens only quite rarely. Even
in a year such as 2005, when the market did indeed go mostly sideways,
there were fluctuations within that narrow trading range that provided
good ripple trading opportunities. A good fluctuating market is always the
one that best suits our trading method. A market that goes up or down
strongly for a long period—such as the bullish market of the last half of
2006 and the beginning of 2007 that topped out February 20—is also not a
favorite of ours, as the opportunities to trade the ripples are much reduced
as a result. However, no market is ever completely without short-term fluctuations,
and you will find us buying to some extent in every market phase.

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