Postcards: Time to Break Out the Kayaks?

These markets are starting to show a familiar pattern - which I've warned readers about in the Republic Risk Letter. Also, let's tread some water with our favorite shipping companies.                                                                                                                                                                                                                                                                                                                                                                                                                 Forwarded this email? [Subscribe here]() for more You are a free subscriber to Postcards from the Florida Republic. To upgrade to paid and receive the daily Republic Risk Letter, [subscribe here](. --------------------------------------------------------------- [Postcards: Time to Break Out the Kayaks?]( These markets are starting to show a familiar pattern - which I've warned readers about in the Republic Risk Letter. Also, let's tread some water with our favorite shipping companies. [Garrett {NAME}]( Jan 3   [READ IN APP](   Equity Strength: With the MACD indicator seeing a widening rate on all three of these indices, we’re on pace to be Yellow very soon… possibly by the end of the day. CAUTION. THESE MAY CHANGE SOON. PLAY DEFENSE. --------------------------------------------------------------- Dear Fellow Expat: Florida wasn’t like the rest of America when it came to COVID-19. We shut down for about a week - looked at how terrible that would be for the local economy - and immediately reopened. Then everyone moved here, and our local economy and property prices boomed. COVID hit us… but not until well after the outbreak’s start. I didn’t get it until July 2022. My daughter caught it in May 2021 - the Delta strain. She was hospitalized. Then, we pulled her out of school for the rest of the year. She was 3.5 at the time. Now, I worked from home - so it didn’t impact me… in the way it affected most people. The experience did impact my brain… as my child was now home ALL THE TIME… I look back on that time with a smile because I watched her grow up. But having a 3.5-year-old bounce into the office - disrupting every five minutes (not understanding what the “Closed” sign means in the office - was an experience, especially when we were starting the network at Money Morning LIVE! Fast forward nearly 2.5 years, and my daughter is on Holiday Break. She’s six. And every 10 minutes, she’s asking me to play cards. In the Florida Republic, we’re trying to navigate another financial crisis in the United States (a refinancing crisis) from this office - all while she’s knocking on the door and the "Cat's in the Cradle" by Harry Chapin echoes in the back of my mind. There’s good news, though. One, we’ll play field hockey later this afternoon and cards this evening. And if this market goes sideways in the next few days (and we have an early signal of that possibility) - then she and I might be out on the water in a Kayak on Monday. Because when our signal goes negative, we move to cash, hedge our positions, and then go and enjoy our lives when the rest of the world panics. Let me explain what’s happening. Updates from the Fed The Fed minutes release comes in 60 minutes, and I’d rather put this note out now than wait until after they arrive. Today’s Fed minutes release is supposed to be about “How Long” interest rates will remain elevated. But Richmond Federal Reserve President Thomas Barkin said that despite expecting a soft landing in the economy - “the potential for additional rate hikes remains on the table.” Hoo boy. That’s a doozy - because it now takes us back to the previous debate of “How High” rate hikes could go… or will the Fed cut… and then be forced to raise rates again? These people need to stop talking… and leave it to Powell. Markets have already priced in a rate cut in March. The December Fed meeting showed a median terminal rate expectation of 4.6% at the end of the year. But the market believes it will be at 4% or lower, based on CME Fed Watch data. As always - the markets don’t believe the Fed. They didn’t believe the Fed on the way up with interest rates - and now they don’t believe the Fed on the way down. My concern here is the same as always. The market gets ahead of itself, forces a massive short squeeze, and moves into overbought territory. We’re starting to see the same price behavior of the tops in January 2022, April 2022, August 2022, and August 2023. We had the same conversations about the Federal Reserve and rate policy at the time. Does anyone remember how it all ended up? What’s weird to me is that I’ve talked about this for two years - and it’s been the same thing - over and over - yet no one in the mainstream press seems to understand that they’re also playing a massive role in this madness. Long-term investors should not care, but there appears to be some weakness on the horizon… I’ll explain more below. But for now, let’s look at price action. Updates from the Republic About an hour ago, I sent an updated analysis of current market conditions to members of the Republic Risk Letter. I’m sharing it with you today because I want you to see the daily analysis level conducted in this letter. If you’re a member of the Republic Risk Letter - you’ve largely received all of this analysis earlier today. So, let’s recap our recent observations. First, we’re watching the Russell 2000 closely. Here’s the movement since last week. It’s breaking down now and happening faster than the S&P 500 because of higher interest rates, more Zombie stocks on the Index, and technical selling ahead of the Fed minutes and the Friday jobs report. The Russell is our north star because it doesn’t have such a significant weight of larger names. From an equal-weight perspective on the S&P 500, we’re seeing a very familiar shift. Today, energy stocks are rising - utilities are neutral, and everything else is under pressure. Meanwhile, the 10-year pushed above 4% today, while we witnessed weakness in materials stocks (especially gold and silver minders) due to a stronger dollar. As I noted above, we have a similar topping pattern that we’ve seen in previous events when our signals move negatively. During this morning’s trading, the negative rate of change on the MACD widened on the S&P 500, the ADX is getting closer to bearish, and the RSI and MFI are dropping (57 each). The same goes for the Russell 2000. Now, I look at this environment and remind all new readers of a very important trend regarding selloffs and understanding how capital flows operate. Markets do not go down in a straight line. There are no “crashes” in the classic term. What happens very often is that prices will drop - but they might fall into the third standard deviation of price. The chart below is the volume-weighted average price (VWAP) of the S&P 500 ETF (SPY). The blue line is the VWAP. The first range outside that blue line (darker green) is the first standard deviation of price. The second band outside the first area - is the second standard deviation. The third band is the third standard deviation. Stanley Druckenmiller - one of the greatest voices on liquidity in the financial markets - said a few years ago that the markets are broken - that trends are broken. What happens is that we have a selloff - and then when stocks or assets get down into that third standard deviation - the algorithms start buying. I’ve been studying this price action for 18 months - and it’s been the story of the Fed’s rate cycle. We don’t see straight lines down. Instead, we see algorithms gobble up short-term gains, and more selling happens. In addition, any short-term selloff doesn’t come all at once because funds can’t dump large amounts of stocks simultaneously when buying pressure is low. You can see in the last three days… it’s not been a straight line down. Multiple intraday bounces have made it look like someone is buying the dip. They have to stretch it out. And that means waiting for opportune times to sell when there are short-term recovery periods. That brings me to the next point. What is the direction we’re likely to see? Well, the selloff over the last three sessions (an early signal of a possible negative event coming in the next week or so) - shows a pattern that looks like a descending staircase. This isn’t a Rorschach test. It’s incredibly common. You can look back to the start of previous 2021 and 2022 selloffs and see similar price activity. This is the price behavior of institutional selling - as they use a technical channel to exit the position. This creates a pathway of head-fake highs and running lows over a period. It’s all very intentional. So What Comes Next? If the last major negative periods are any guide, I would look for the following pattern. A period of selling lasts a few days, and suddenly, the Russell 2000 is down around 1,900 (it would test 1,950 next, with a possible move back up at the end of the day). From there, we will see if there is a short-term rally of short covering on very low buying volume. If those two things happen, we must worry about a June 8, 2022-style risk selloff driven by funds. Our signal went negative that day - and we found out a week later that it was the start of the largest hedge fund selloff in 15 years. I don’t think a selloff in this environment would be a slow burn like we saw in April to June 2022 or August to October 2023. It would likely be more sudden, like January 2022 or June 2022. As always, I hope this is all a false alarm and that we can rebound and keep moving higher with confidence. But we’re due for some profit-taking. The price action will determine whether that turns into another self-induced panic. Remember… the purpose of a market is to sell. We’re seeing that behavior creep upward as the week extends. If we start to see a deeper selloff, we’re already prepared. [I wrote this last year](. It’s our Six Rules for Negative Momentum. If we find ourselves with the Red Flags waving… [it would be best if you were prepared.]( Finally - I released the Republic Risk Portfolio yesterday, focusing on beaten-down stocks with attractive fundamentals and breakout upside. While the rest of the market is under pressure, our portfolio is heavy on shipping companies that have broken out over the last 48 hours. Thanks to our quantitative approach, these stocks have lower downside and higher reversion upside. Our top name is a deeply discounted player in the global chemical shipping industry, paying a nearly 8% dividend and trading at a big discount to its intrinsic value. Be sure to check it out and join us at Republic Risk. [Upgrade to paid]( Now if you don’t mind, I have a lunch date with a six-year-old. Stay positive, Garrett {NAME} Secretary of Defense Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. Under company rules, editors and writers cannot recommend their positions. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.   [Like]( [Comment]( [Restack](   © 2024 Garrett {NAME} 548 Market Street PMB 72296, San Francisco, CA 94104 [Unsubscribe]() [Get the app]( writing]()