Postcards: Tornado Watch

You can't have a tornado cellar in Florida, as it would instantly flood. What does the storm warning in Lee County have to do with the state of the market?                                                                                                                                                                                                                                                                                                                                                                                                                 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: Tornado Watch]( You can't have a tornado cellar in Florida, as it would instantly flood. What does the storm warning in Lee County have to do with the state of the market? [Garrett {NAME}]( Jan 9   [READ IN APP](   Market update: We started in the red… and we’ll finish in the green? This was a VERY low volume day, with 0.67 relative volume on the S&P 500 SPDR ETF (SPY) and just 0.65x on the iShares Russell 2000 ETF (IWM). This means there was just 67% of average trading volume on the most important ETF in all finance compared to trading over the last month. Dear Fellow Expat: Today, Amelia stayed home because she was sick. The thing in… she’s “better.” That means that she’s been bouncing around the house like a ping-pong ball. I’ve had to endure three hours of the show Numberblocks - an animated show about mathematics with dancing and singing blocks that never stop counting. Seriously… they never stop. The people who do the voices on this show either really like addition and subtraction… or they REALLY need to pay their rent. Dall-E I can’t imagine two children in this house right now… let alone three. My sister had twins. Around this age, they had to put my sister’s sanity on a milk carton. Dall-E Of course - my wife is now sick - so this will be a very interesting 48 hours. Because I know that I’m getting whatever they have next… This becomes an important period. Let’s say that I’m out of commission tomorrow. Then I don’t have to worry. Market volumes are very low. We’re seeing low-volume moves higher in the market - and a lot of that chop action that has typically preceded larger selloffs (Selling momentum remains strong, even in a rising market). If I’m out on Thursday, though - it’s a different animal. That’s when the Consumer Price Index arrives. Given that the markets are so hellbent on forecasting the Federal Reserve’s next move on interest rates, any surprise to the upside will hit the S&P 500 and the Russell 2000 hard - at a time when both are fighting key resistance levels. If a storm is coming in my belly - “it’s time to close the shutters. It’s time to go inside.” [to quote Jimmy Buffett](. It’s time to protect our capital. And you can’t afford to not prepare for the next few days. Let’s talk about what this means. Storm Warning I received an email from Lee County’s emergency response team an hour ago. There’s currently a tornado warning across multiple counties in Florida. Since we’re near the water, the possibility of water spouts increases, and it’s incredible to see something so mysterious, beautiful, and dangerous. I feel similar about our [Equity Strength Signals](. When selling pressure increases, order volume slumps, and topping patterns form - similar to the one we saw in November 2021, which led to the January 2022 selloff. You have to marvel at it. History doesn’t repeat, but it does rhyme. From a technical standpoint, I’m mesmerized by the prospect of this double-top pattern. This overbought market is also complemented by retail investors failing to learn their lessons. If we look at the chart below, non-dealers have poured into the equity futures market - bringing us to the most “bullish” sentiment since the start of 2018 - when things went awry in February of that year. Tap in the bullish sentiment in January 2020… and January 2022… and you have some verses that rhyme. While liquidity remains robust - and the People’s Bank of China is again pumping capital into the system - I can’t help but feel that the curse of even years is back upon us. We had big selloffs in 2018, 2020, and 2022… and it looks like another rollover soon. How to Protect Your Portfolio Since the end of December, I’ve made a few recommendations for managing the current environment. First, you can sell covered calls to great companies. If you own 100 shares of a company you want to hold for the long term (and I explained how to find some of these names yesterday), sell a covered call and generate some income. Covered calls can be a hedging strategy to help stock owners manage portfolio risk. In this strategy, the stock owner sells call options on stocks they already own. This allows them to earn premium income from the options they sell. When a stock owner writes a covered call, they grant someone else the right to buy their stock at a specific price (the strike price) within a certain time frame. If the stock stays below the strike price, the call will likely expire worthless, and the owner will keep the premium as income.  This premium provides a cushion against a decline in the stock price. Essentially, it lowers the effective cost basis of the stock, offering some protection against a downturn. When we start to see a technical top form in the market — and buying pressure slows — it’s an excellent opportunity to take this approach. More advanced traders may consider selling the call and then using the proceeds to purchase protective puts against the threat of a broader financial downturn.  There’s no sense in just dumping stocks - even if we face the prospect of a short-term selloff. If we see a market pullback - I firmly believe the Fed will provide support. If you don’t trust this, consider buying puts on the existing positions. Options are a form of insurance. They should not be a wild speculative took like so many people in our industry recommened. You want to use options properly. If you own 100 shares of Apple (AAPL) and want to protect long-term profits, you might go out to March and buy a put 10% to 15% lower than today’s price. If the stock does fall under the strike price on or before the expiration date, you have the right but not the obligation to sell 100 shares of stock to the person who sold you the option at that specific strike price. If you don’t want to use options, you can consider using limit orders. If AAPL trades at $185 today, you might set a hard stop limit of $170. And if the stock falls to that level, it will automatically trigger a sale. Build Cash… Now. In addition, this is an excellent time to start building a cash position. Markets go up… then they go down. And if we find ourselves in an oversold position on the S&P 500 or the Russell 2000, we need cash to buy these dips and ride the next wave higher. Now - we’d typically look for opportunities to sell puts or credit spreads on stocks we want to own. But… and this is important - the only sector that I like to do these spreads on in this environment is the energy sector. And our [Energy Sector signal is negative](. A week ago - I had three credit spread trades… two on Occidental (OXY) and one on Exxon Mobil (XOM). My positions were all positive - but with energy turning negative, I exited both positions with a small gain instead of rolling the dice. If you’ve sold puts or credit spreads, you want to target about a 65% gain in the premium… if the respective signal goes negative, take the gains. Occidental is off 3.6% in a week (since the signal went negative). Exxon is off 2.5%. Valero (VLO) is off 2.6%. So… when do we go back into energy? Either when the signal turns positive. Or… this ETF - the [MicroSectors U.S. Big Oil Index 3X Leveraged ETNs (NRGU)]( a 30 or less on its 14-day Relative Strength Index and around a 20 on the Money Flow Index. At that point, we can sell puts on names like VLO and take advantage of the Warren Buffett Occidental trade. The NRGU has an RSI of 43.5 and an MFI of 46. There is still more downside here. Trading Negative Readings If you’re new to the Florida Republic, there’s only one must-read ahead of any storm in the market. Last year, I put together this guide called… [Six Rules for Negative Momentum.]( When our signals go Red… these are the six things you need to do to set yourself up for a massive profit opportunity as the market shakes out. If you want more - the Republic Risk Letter is at your service. This follows the three major variables that I argue drive this market - Liquidity, Momentum, and Insider Buying (As a contrarian clue). Two days ago, in the comments section, BigDogNoah wrote this. This comment humbles me, as it justifies years of academic work and experimentation to discover how our markets work. Finance and economics are incredibly complicated. Our worldview, however, is simple… I know. That’s the point. All that stress I’ve carried has dissipated since I started walking this path in the markets. We follow the money… we follow the flow… and control what we can control. Most of all… we stay positive, Garrett {NAME} 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]()