AI Sector Shaken By “DeepSeek’s” Competitive Edge

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the market

The major indexes experienced a sharp decline right after the market opened, driven by the emergence of a Chinese startup called DeepSeek.

This company posed a significant threat to existing AI models by offering competitive solutions at a fraction of the cost. Last week, DeepSeek released an open-source AI simulator that not only outperformed OpenAI’s models in various tests but also utilized less expensive chips and more efficient software. The model, introduced in December, was reportedly available for less than $6 million, a figure that analysts found hard to believe.

The immediate fallout in the tech sector was severe, with major players like Nvidia and Broadcom each dropping 12%, along with other mega-cap tech names. Given the already high valuations, this prompted profit-taking, with traders shifting their focus to more defensive positions.

This week, investors are anticipating quarterly results from the “Magnificent Seven” and the Federal Reserve’s meeting on interest rates. Current odds suggest a 99% chance that the Central Bank will leave rates unchanged.

On the economic front, there was positive news: the Chicago National Activity Index surged, home sales rose for the second consecutive year, and the Dallas Fed Manufacturing number saw its largest increase since the COVID-19 lockdown.

However, as ZH pointed out, these developments were overshadowed by DeepSeek’s affordable AI model, which dominated market sentiment. This led to a significant pullback in the S&P 500, the Nasdaq, and AI-related stocks, while the Dow remained unaffected and closed in the green.

Gold prices declined but stayed near record highs, and Bitcoin briefly fell below the $100k mark before rebounding. Oil prices collapsed as traders speculated that reduced data power demand would lead to lower energy resource requirements.

On a positive note, bond yields fell, with the 10-year yield retreating by nearly 10 basis points, and the dollar strengthened after bouncing off six-week lows.

The panic in the AI sector was profound, as big tech companies have invested hundreds of billions in the sector and rely on continuous revenue streams to remain viable and maintain margins. This new development may have hit a significant obstacle, and only time will reveal the true impact.

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ETFs On The Cutline – Updated Through 01/24/2025

Ulli ETFs on the Cutline Contact

Do you want to know which ETFs are hot and which ones are not? Then you need my High-Volume ETF Cutline report. It tells you how close or far each of the 311 ETFs I follow is from its long-term trend line (39-week SMA). These are the ETFs that trade more than $5 million a day, so they are not some obscure funds that nobody cares about.

The report is split into two parts: The winners that are above their trend line (%M/A), and the losers that are below it. The yellow line is the line of shame that separates them. You can see how many ETFs are in each group and how they have changed since the last report (163 vs. 180 current).

Take a peek:

The HV ETF Master Cutline Report

If you are confused by some of the terms we use, don’t panic. I have a helpful Glossary of Terms for you.

If you want to learn more about the Cutline method and how it can make you rich (or at least less poor), read my original post here.

ETF Tracker Newsletter For January 24, 2025

Ulli ETF Tracker Contact

ETF Tracker StatSheet          

You can view the latest version here.

S&P 500 RETREATS AFTER RECORD HIGH, BUT WEEKLY GAINS PERSIST

[Chart courtesy of MarketWatch.com]

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After reaching a new record high early in the day, the S&P 500 retreated but remained close to its unchanged line, positioning itself for a second consecutive weekly gain.

However, sentiment turned bearish by the end of the day, leading the major indexes to close in the red. Despite this, the week ended on a positive note, with market breadth improving significantly and the short squeeze continuing.

Equities benefited from pro-business policies, with traders relieved that the threat of tariffs has so far been limited to announcements rather than formal actions.

The mega-cap tech sector rallied for the second straight week, closing near its highs. The past couple of weeks have been positive, suggesting that the December pullback may be over and bullish sentiment has returned. This optimism is further supported by Trump’s demands for lower interest rates and a reduction in oil prices.

While macroeconomic data initially showed improvement, the week ended on a down note with a decline in services and rising inflation expectations.

Bitcoin and gold extended their gains, with gold nearing its all-time high. Conversely, the dollar suffered its biggest drop since July 2023.

Bond yields, after a sharp drop last Tuesday, rallied back to close the week about unchanged. Crude oil prices experienced their largest weekly drop in three months and have been down for six consecutive days.

I find it interesting to observe divergences in asset classes that typically move in sync. Currently, stocks and bonds are presenting such a divergence, particularly when comparing the S&P 500 to the 10-year bond yield.

This chart highlights the current conundrum, suggesting that a correction in equities may be on the horizon.

Will history repeat itself?

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Weekly StatSheet For The ETF Tracker Newsletter – Updated Through 01/23/2025

Ulli ETF StatSheet Contact

ETF Data updated through Thursday, January 23, 2025

How to use this StatSheet:

  1. Out of the 1,800+ ETFs out there, I only pick the ones that trade over $5 million per day (HV ETFs), so you don’t get stuck with a lemon that nobody wants to buy or sell.
  1. Trend Tracking Indexes (TTIs)

These are the main indicators that tell you when to buy or sell Domestic and International ETFs (section 1 and 2). They do that by comparing their position to their long-term M/A (Moving Average). If they cross above, and stay there, it’s a green light to buy. If they fall below, and keep going, it’s a red light to sell. And to make sure you don’t lose your shirt if things go south, I also use a 12% trailing stop loss on all positions in these categories.

  1. All other investment areas don’t have a TTI and should be traded based on the position of each ETF relative to its own trend line (%M/A). That’s why I call them “Selective Buy.” In other words, if an ETF goes above its own trend line, you can buy it. But don’t forget to use a trailing sell stop of 12%, or less if you’re feeling nervous.

If some of these words sound like Greek to you, please check out the Glossary of Terms and new subscriber information in section 9.

  1. DOMESTIC EQUITY ETFs: BUY— since 11/21/2023

Click on chart to enlarge

This is our main compass, the Domestic Trend Tracking Index (TTI-green line in the above chart). It has broken above its long-term trend line (red) by +5.86% and is in “Buy” mode as posted.

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Crude Oil Falls And Bitcoin Surges As Markets Show Mixed Reactions

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the market

Yesterday, the S&P 500 set an intra-day record, but it slipped early today as the overall markets showed weakness, likely due to profit-taking. However, the index regained momentum later in the session, closing in the green once again.

Recent market advances have been fueled by optimism surrounding potential tax cuts and deregulation under the Trump administration, along with signs of more resilient economic growth. The idea of tariffs has received mixed responses, and only time will tell if they will be as beneficial as initially anticipated.

The fourth-quarter earnings season is off to a strong start, with Netflix and major banks reporting better-than-expected results. However, American Airlines was a notable exception, offering weak guidance and seeing its stock plummet by 6%.

On the economic front, US continuing jobless claims increased, nearing their highest level since November 2021, with no other significant news affecting the Citi Economic Surprise Index.

Crude oil prices fell again, influenced by Trump’s “drill, baby, drill” stance. Bitcoin surged past $106,000 but gave back some of those gains by the close.

The Nasdaq lagged today, but small-cap stocks were buoyed by another short squeeze, as the markets overall benefited from improved market breadth over the past week.

Bond yields edged higher, and the dollar weakened on tariff threats, as Trump continued his criticism of high oil prices and interest rates.

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Tech Sector Drives S&P 500 To New Record High Amid AI Optimism

Ulli Market Commentary Contact

[Chart courtesy of MarketWatch.com]

  1. Moving the market

Bullish sentiment persisted today, with the S&P 500 reaching a new all-time high, driven by strong performance in the tech sector. The Nasdaq led the way, while Small Caps lagged and ended the session in the red.

Oracle (+6%) and Nvidia (+4%) saw significant gains, fueled by optimism surrounding AI and the announcement of a $500 billion AI infrastructure investment by Stargate, which boosted the entire mega-tech sector. Even the announcement of a 10% tariff on China starting February 1 by President Trump couldn’t dampen the market’s enthusiasm.

Netflix (+10%) and Procter & Gamble also advanced, thanks to strong quarterly earnings reports. Traders appear to be in sync with the recent market-friendly executive orders from the new administration, particularly those focused on deregulation and energy.

Today’s market rally occurred despite rising bond yields, which helped the dollar recover from yesterday’s sell-off. Gold remained unaffected by these movements, climbing towards its all-time highs, and decoupling from its usual correlation with the dollar.

Bitcoin, meanwhile, seemed to be consolidating after yesterday’s bounce, drifting moderately lower. This could potentially set the stage for its next leap into record territory.

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