The DeepSeek Deep Six?

The music had been beautiful. The sun was out. Birds were singing. Children were playing. Suddenly an uptrend on Wall Street was placed under pressure. Our old friend, or should I say... arch nemesis... the "Ugly Stick" started making noise, started warming up ... for a double appearance at 11 Wall, and up at Times Square. 

The citizens of Gotham sought early protection in Treasuries. European stocks fell, and U.S. equity index futures fell even harder. There was news out of China. Unwelcome news, for the tech set. Bitcoin and other cryptos were beaten like a rented mule. 

Those rising from their beds this morning still unaware, better wake up quickly. They can expect U.S. tech stocks to take quite the beating this morning, as Chinese AI startup "DeepSeek" has produced a large language model that appears to be outperforming those created by U.S. rivals. DeepSeek's initial model, known as "R1" has supposedly already outperformed established offerings run by such household names as OpenAI and Meta Platforms META. 

Those rising from their beds this morning still unaware, better wake up quickly: They can expect U.S. tech stocks to take quite the beating this morning, as Chinese AI startup "DeepSeek" has produced a large language model that appears to be outperforming those created by U.S. rivals. 

The issue? DeepSeek's open source, large language model, DeepSeek V3, which was actually released in December, took less than $6 million to build, using Nvidia NVDA H800 chips to train on. R1, which is built off of V3, has been developed with an aim to perform complex reasoning and is said to compete well against Open AI's "o1." 

How did DeepSeek create such a competitive model in such a cost-effective way and do so on what were thought to be "less capable" chips as U.S. export controls had kept more capable chips out of Chinese hands? The markets will react this morning to the idea that the U.S. lead in developing artificial technology has narrowed and training the hardware may not be as expensive as previously thought. This news will force a risk-off environment upon U.S. financial markets on Monday morning. Are tech stocks, AI stocks in particular about to be re-rated at a lesser valuation? 

Remember, even if the gravy train is taking a detour for the purveyors of AI infrastructure, that opportunity will arise on the buyer/user end of AI technology. The environment can always be expected to change in unexpected ways. How we adapt is what makes us what we are. We understand change. We identify threats and targets of opportunity. We adapt. We overcome. We carry on. That's how we roll. Fear? Fear is but for the wicked. So, let the wicked tremble before us. Now, let's get after it.

Rise, My Legions 

For today is ours. For every day is ours. Every single day. We are done with the four-day workweeks for a while. That has to be music to the ears of the profit/loss and commission driven crowds, who don't get paid when they do not work, which is a sizable portion of Wall Streeters. With trading closed for at least one full day in four of the past five weeks due to holidays, traders and investors cannot just finally get down to business this week but get down to business as usual.

We traders and investors are, if nothing else, creatures of habit. Strange, when you're young, you work for someone else and are usually paid a base salary and if lucky, a bonus as compensation. Once you prove yourself, you go out on your own, forsake the salary and bonus... and only eat what you can kill. That's why we don't love time off. Glad to be back. Glad, not just because it makes budgeting my month easier, but also because it makes organizing my life easier. It will be good to get back to what has more or less been an almost four decades long weekly ritual. My week starts on Sunday morning. Then I take off a bunch of hours and really get after it on Sunday evening. Days off screw that routine up.

Weekdays get messy as well. I wake at 3:30 a.m., and pretty much work my tail off into the closing bell at 4 p.m. I then take off three hours and get back to it at 7 p.m. as the Asian markets get rolling. I try to hit the hay around 10, but sometimes 10:30, and I do that all week. Some folks may scoff at such hours, but that's Wall Street ... and this, for me, is after slowing down a little as I have aged as a concession to my beloved. When I was younger, I didn't take three hours off in the evening. When I was still in the Reserves....

Well, you get the picture. A loss of regimentation leads to a loss of discipline and in our business, a loss of discipline is unacceptable. I may or may not be smart, but being smart on Wall Street hardly makes anyone special. The differentiator is work ethic and discipline. So, rock on, my friends. At least we don't have to worry about any unwelcome, unproductive, mind-draining days off for a few weeks. Let victory be in our grasp, even at the onset of what will be a tough day for the net long crowd. Always faithful.

Last Week

The first week of the second Trump era was a good one for U.S. financial markets. The president almost immediately launched a plethora of executive orders aimed at either undoing the damage done or unwinding the progress made by the previous administration, depending on one's political point of view.

You are entitled to those views and so am I, but here, I will do my best to speak from a dollars-and-cents perspective and not about politics, at least until economics and politics intersect and then I am forced to speak as an economist. All economists have biases, and many of those biases are colored by political opinion.

The macro was on the light side last week, and the clown car shifted from the Fed (as the FOMC is in their media blackout period) to Davos, Switzerland. The president stole that show as well without leaving the U.S. He spoke to his very wealthy audience about oil prices, possible tariffs on European nations that, in his view, have mistreated U.S. tech firms, and banking. Perhaps the biggest news that the president made last week, was in not immediately launching 25% tariffs at neighbors Canada and Mexico and in mentioning that he would "rather not" put tariffs on China. Guess we'll know more by Feb. 1, unless we don't.

While U.S. Treasuries rallied into Inauguration Day and then sold off throughout the week, U.S. equities were strong until Friday, when the mid-major to major indexes all appeared to suffer some profit taking. The S&P 500 made a new intraday record high last Wednesday for the first time since Dec. 6 and a new record closing high on Thursday. Remember the non-Santa Claus Rally? Remember the rocky early to mid-January performance? All is forgotten, as long as last week's gains were for real and hold. We do have the Fed this week. We do have earnings releases by a slew of Mag 7 stocks. What could possibly go wrong? We may have just found out.

Marketplace 

Among the major to mid-major U.S. equity indexes....

- The S&P 500 gave up 0.29% on Friday, but up 1.74% for the week.

- The Nasdaq Composite gave up 0.5%, but up 1.65% for the week

- The Nasdaq 100 gave up 0.58% on Friday, but up 1.55% for the week.

- The Russell 2000 gave up 0.3% on Friday, but up 1.4% for the week.

- The S&P Small Cap 600 gave up 0.2% on Friday, but up 0.92% for the week.

- The S&P Mid Cap 400 gave up 0.08% on Friday, but up 1.11% for the week.

- The Dow Transports gave up 0.2% on Friday, but up 1.06% for the week.

- The Philly Semiconductors gave up 1.89% on Friday, but up 0.61% for the week.

- The KBW Bank Index gained 0.39% on Friday and up 1.03% for the week

On Friday, even with the indices down, six of the eleven S&P sector SPDR ETFs closed in the green, led by the Utilities XLU and Communication Services XLC. Technology XLK was the day's laggard as the semis were dragged lower by Texas Instruments TXN.

For the week, ten of the eleven S&P sector SPDR ETFs closed in the green, as four of these funds gained at least 2%. Energy XLE was the sole loser for the week, catching a beating of 2.82% over the four days.

On That Note...

I am sure that most readers noticed that Meta Platforms META CEO Mark Zuckerberg announced last week that Meta is increasing its AI-focused spending by up to $65 billion this year. Between the data center and payroll, the firm spent approximately $40B on AI last year. That kind of spending can be contagious or could have been contagious.

Is that a super positive for the likes of Nvidia NVDA? I think it would have been. Maybe even Broadcom AVGO, Advanced Micro Devices AMD, and Marvell Technology MRVL as well. Instead? Pain. Nvidia alone is down 11.4% as we cruise through the zero-dark hours on Monday morning. Mighty Palantir PLTR is down 6.4% even as this news does not appear to impact that firm directly.

One For the Good Guys

I love it when we nail a "Day One" and a "Confirmation Day" as we did with the confirmation on Friday, Jan. 17, of the day one of an upward change of trend on Wednesday, Jan. 14. I love it, not just because I was right about something and it made me and hopefully you, some dough, but because it's proof that even in this era, some of the basics of tactical trading still work. Blocking and tackling is still how you win and that is so refreshing.

 



Suddenly, for the S&P 500, relative strength is improved, the daily Moving Average Convergence Divergence indicator is set up much more bullishly, with all three components above zero and with the 12-day Exponential Moving Average above the 26-day Exponential Moving Average. The threat now, which is no sure thing, is that the algos that control price discovery in 2025, realize that this broadest of large cap indexes is not at a level that could end up looking like a double top reversal.

 





Readers can easily see that the Nasdaq Composite is also in better shape and also facing the same threat. So, was Friday a "Day One" to the downside? The short answer, even if markets trade lower today, is "no." Why? Winners beat losers at both the NYSE and the Nasdaq on Friday. Advancing volume also took a majority share of aggregate trading volume at both the NYSE and Nasdaq on Friday. You cannot have a day one reversal or trend, regardless of what the indices do, on a trading day where the breadth is in complete contradiction to equity index performance. However, I make no such promises concerning Monday.

Earnings 

According to FactSet, with 16% of the S&P 500 having reported their fourth quarter earnings, 80% of those firms reporting have beaten earnings expectations, while just 62% of those reporting have beaten revenue expectations. At this point, for the quarter, earnings growth is running at a blended (results & expectations) rate of 12.7% (up from 12.5% a week ago) on revenue growth of 4.6% (which is down from 4.9% a week ago). 

For the quarter, the Financials are expected to post by far the greatest earnings growth at +49.4%, with Communication Services in second place at +20.7%. Four sectors are expected to show a year over year earnings contraction, led lower by Energy at -30.7%. 

As for the current quarter (Q1, 2025), consensus is currently for earnings growth of 11.3% (down from 11.6%) on revenue of 5.0%. For the full year 2025, Wall Street sees earnings growth of 14.8% on revenue growth of 5.9%. As for valuation, the S&P 500 went into the weekend trading at 22.2 (up from 21.6) times 12-month forward looking earnings and 28.6 (up from 27.7) times 12-month trailing earnings. These ratios remain well above their respective five-year and 10-year averages.

What's Ahead? 

• Prepare to defend yourself as the Ugly Stick makes a Monday appearance.

•  The Fed should be the main event this week, but we really never know. The FOMC will make a policy decision on Wednesday afternoon and follow that up with a press conference a half hour later. That said, there are no quarterly economic projections being made and we have no Fed speakers on the radar, not even for later this week, which is unusual. I am sure that a few of these folks will crawl out of their holes, but right now I see nothing.

•  Politics. If the Fed doesn't make headlines or maybe even if they do, the president surely will. On top of that, look for Scott Bessent to be confirmed by the Senate as the next Secretary of the Treasury literally at any moment. This could happen by the time you read this.

•  This will be a heavier week of macroeconomic data releases than was last week. That isn't really saying much. The main events will be December new home sales on Monday, December durable goods orders on Tuesday. Within that report will be the all-important Capital Goods Orders component. Our first look at Q4 GDP will be published on Thursday morning to be followed on Friday by December PCE and Core PCE inflation as well as December Personal Income and Personal Spending.

•  Earnings season heats back up this week. This morning, we'll hear from AT&T T and SoFi Technologies SOFI. As the week progresses, we'll also see quarterly numbers released by Boeing BA, General Motors GM, Lockheed Martin LMT, RTX RTX, IBM IBM, Meta Platforms, Microsoft MSFT, Tesla TSLA, Northrop Grumman NOC, Apple AAPL, Intel INTC, and Exxon Mobil XOM. With so many members of the Mag 7 reporting this week, earnings will be central to whatever happens as the week progresses.

Economics (All Times Eastern)

10:30 - New Home Sales (Dec): Expecting 669K, Last 664K SAAR.

10:30 - Dallas Fed Manufacturing Index (Jan): Expecting 4, Last 3.4.

The Fed (All Times Eastern)

Fed Blackout Period.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: T (.49), SOFI (.04)

After the Close: NUE (.62)

At the time of publication, Guilfoyle was long SOFI, NVDA, AMD, PLTR, LMT, RTX, MSFT, NOC, INTC, XOM equity.