DeepSeek News Bomb

Will DeepSeek be the straw that broke the camel's back?  We'll find out within the next few weeks, but my view is that this is another hyped up story that ends up being ignored in a couple of weeks.  Most investors think that AI is the next big thing.  They think it will be a game changer that makes a big chunk of human labor obsolete and drive huge productivity gains.  In theory, if you combine AI with advanced robotics, that could happen.  If it was so easy and obvious, why hasn't it been done already?  Robots have been around for a long time.  So has AI.  Faster GPUs are what's making this all possible?  Or even DeepSeek?  

I admit that I am skeptical about lots of new techologies that get hyped up.  One that I was definitely not skeptical about from the start was the internet.  It was obvious from the get go how huge it would be.  Most could feel the difference right away.  There was no abstract theories or views of the future that was needed to get people to believe.  Just being able to send email and browse the internet with Netscape was enough to get people to see the immense possibilities.  

With AI, you have to be believe in the unknowable future, an abstract, theoretical view of how AI will change people's lives.  Its mostly theory, currently with limited practical uses that are expansive.  ChatGPT and making AI generated videos is nice, but its not a sweeping technology that changes the way people communicate and get information.  They talk about all the productivity enhancements from AI, but if so, why aren't more people getting fired from the big tech companies that are getting this great AI productivity boost?  Higher productivity means less workers needed.  

The reaction to the news is surprising, given how much bonds are up.  It definitely feels like a lot of weak hands got long last week after the inauguration, so this is probably some stops getting hit, as well some dealer delta hedging overnight as IV goes up as prices go down.  Moves like this does show how much more fragile and dangerous this market.  When you have so much money that's flowed into US stocks, many by late to the party, less informed weaker hands, you can get these big gyrations out of the blue.  It speaks to the saturation of long positioning among investors.  There is no other way to explain these sudden drops in the market, like what you saw at the last FOMC meeting, and now again overnight on DeepSeek fears.  

There were no big changes in the COT data as of Tuesday, January 21.  Asset managers have aggressively reduced net longs, but from a historical view, its still a big net long position.  The pullback from mid December to mid January did purge some overextended long positioning, so the market now is not as dangerous as it was in December.  But big picture, you will get these big one day drops more often going forward because of the higher valuations.  

Based on the price action you saw overnight, it is definitely weaker than it should be given the news.  So whenever I see a huge move like this that doesn't make sense, I prefer to wait and let the dust settle before making any big moves.  I do believe its a shakeout type of move that will eventually reverse, so its at least worth taking a small position looking for a bounce.  I put on a small long in the overnight session, looking to hold for several days.  If we didn't have such a big up move over the past 2 weeks, I would be considering a bigger position.  But we're not at great levels for longs, so only going with a small position.