it's clipboard filters ?
need to be done inside the clipboard and paste it out later ?
Yes. The only way Keyboard Maestro can see what is selected is to Copy it to the system clipboard.
If some applications you might be able to get the selection via AppleScript or Accessibility APIs. And in some applications you can often use Command-E to Enter Find Select and then the FindPasteboard token.
But copy to the system clipboard is the only general way.
So to change the case of selected text it would be:
oh really !