Daily Commentary: January 28, 2025

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DeepSeek Is Not the Issue

Posted by Pete Stolcers on January 28
www.oneoption.com

This headline was an excuse, but it is not the reason for the tech sell-off Monday.

PRE-OPEN MARKET COMMENTS TUESDAY – The market dropped yesterday on news that a Chinese company has figured out a much cheaper way to develop AI. This rattled the tech sector and the S&P 500 dropped more than 100 points. I’m not going to pretend that I am an AI expert and I don’t know to what degree this is going to impact Nvidia and other tech giants.

What I do know is that forward P/Es for tech stocks are at levels not seen since 2000. Stocks are priced for perfection and any little wrinkle or drop in demand is going to cause the type of reaction we saw yesterday. For many companies, all they have to do is include AI in the company description and it will attract investors. This is similar to the dotcom bubble 25 years ago. Prices are lofty and we are heading into mega cap earnings. MSFT, AAPL, META and TSLA report this week. Hundreds of billions of dollars are being spent on AI and it might be years before they figure out how to monetize this investment.

I will be watching Chinese revenues for AAPL and SBUX when they report. That will give me a feel for consumption and I don’t trust any of China’s releases. If they are particularly weak, it will weigh on global demand.

The FOMC Statement is tomorrow and the Fed has been more hawkish since the last statement. They want to remain flexible and they feel that Trump tariffs could ignite inflation. US economic conditions have remained stable so they don’t have any reason to cut rates now. They have the data points and based on the trends I am seeing, I believe we are going to see signs of an economic deceleration in the next two months. The Fed wants to retain flexibility as long as possible and I am expecting a fairly neutral statement. The market is addicted to easy money so it doesn’t like neutral. It wants some rate cuts sooner than later.

If buyers were “licking their chops” on the new all-time high Friday, they would have aggressively bought the drop yesterday, but they didn’t. In fact, the year end rally was a “nothing burger” and it came on extremely light volume. The post inauguration high also came on minuscule volume. Buyers are not excited.

As it stands, the market has been trading in a horizontal range for the last three months. This week we have a lot of potential market drivers. Keep your swing trades tiny (cash is better) and be ready for action after the FOMC tomorrow.

From a bearish standpoint, I want to see a crackdown and a close well below the 50-day MA. A neutral reaction to the Fed is not what we want. Mixed earnings reactions (two stocks up and two stocks down) from mega cap tech companies is not what we want. If we get that, we will continue to be trapped in this trading range.

The market is trading slightly higher this morning. Europe also rebounded overnight. Chinese markets are closed for the New Year.

Look for a dull trading session. Support is at the 50-day MA and resistance is at the all-time high.

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