Postcards: How the Markets Really Work

It's not supposed to make sense. All you can do is react.                                                                                                                                                                                                                                                                                                                                                                                                                 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: How the Markets Really Work]( It's not supposed to make sense. All you can do is react. [Garrett {NAME}]( Feb 2   [READ IN APP](   Dear Fellow Expat: It’s not supposed to make sense. I argue that anyone who thinks their MBA or CFA matters in today’s environment is foolish. Machines run the equity markets… Not humans. Valuations are distorted by the massive amounts of passive investing via exchange-traded funds (ETFs), and machines regularly buck trends, which I’ll explain. Algorithms do more than 80% of all trading. We are simply hired actors. The only thing we can do is react, and that’s why we created our Equity Strength Signals. We know when the machines are selling, and we are well ahead of liquidity challenges that might send the market… much… much lower. A few things brought me to this conclusion. Michael Howell’s book Capital Wars altered my thinking about how “money moves markets.” Grant Henning’s book Trading Stocks By the Numbers helped me understand momentum at its core. But Stanley Druckenmiller is the one person who really helped me recognize how distorted reality is in the financial markets. In 2018, he did an interview with Realvision.com. [And it’s easily the most important financial interview]( of the last 20 years. Druckenmiller noted that passive investing has distorted markets. There’s no real trend when big companies like Blackrock buy up stocks, charge fees, and then lend the stock to short sellers. More importantly, he noted that when markets sell off… they produce a market like the chart below. The Blue line is the Volume-Weighted Average Price (VWAP). The lines outside that blue line are called Standard Deviations (or Bollinger Bands). The third standard deviation is the top and bottom ranges. When the S&P 500 falls into that third deviation band… the algos buy everything up. This is an S&P 500 SPDR Select ETF (SPY) chart. It’s what traders call the SPY. It’s the original ETF of the markets. Remember - these machines are buying for $484 and selling for $485 in massive volumes. They can exploit these price movements. But you lost money if you tried to short this market when the S&P 500 fell into that third band… well. This type of behavior is very recognizable. Druckenmiller pointed it out six years ago, and it's been an honest pattern. Be cautious in trying to short this market. Instead of selling or moving to cash, sell covered calls on existing positions - stay in this market because the upward bias remains strong. So long as the Fed is providing liquidity to the market's plumming, it will all be good moving forward. We’ll dig into specifics on Monday. For now, we’re bullish on energy storage and semiconductors. We’ll talk about why Kinder Morgan (KMI) is a hero stock moving forward. Enjoy your weekend… and 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]()