Thank you guys for joining me and welcome to Episode 7 of Season 2 brought to you by Magnelibra Trading & Research. This episode is entitled “AI Revolution or ReEvaluation, DeepSeek is a Game Changer”
Quick Disclaimer: The following podcast is for educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and may not be appropriate for all listeners.
The story for the week wasn’t the BOJ rate hike, but rather came out of China as DeepSeek R1 an LLM or (large language model or what many call “AI”) has begun to make its way around the world. This artificial intelligence sets itself apart as it scored as high or higher that OpenAI, the company responsible for the new StarGate Initiative here in the U.S. the conglomerate committed to putting $500bn to work to improve AI. Well not only has DeepSeek scored just as good or better, more importantly it is open source! This means anyone can tweak it and customize as they say fit and all of it coming at well over a 90% cost discount. This should be a cause of major for concern, not only for all of Silicon Valley tech companies who have spent billions but also for their very lofty valuations that depend on constant inflation of spending in this AI arena. However if a Chinese company like DeepSeek can compete at pennies on the dollar, we believe Silicon Valley has a serious, serious over valuation problem on its hands. From the Geo-political perspective this is a major blow to the United States and their technological supremacy, for the big question becomes is if their AI is this advanced at a fraction of a cost, what else have they been hiding and worse, is China an advanced threat to America now in ways we haven’t previously known or foreseen? This is a very big deal in that regard, but this is also, technically a very large advancement and one that makes perfect sense to us, in a world where tech advances and yet somehow we were led to believe the costs of all this continues to rise, well China has proved this to be false, the more advanced things become, the probability that prices would contract seems far more likely. Maybe only in America where government hand outs and corporate charity always seem to have a never ending trajectory are perpetual higher costs and prices a reality, whereas in China where efficiency and scarcity of resources forcefully drive innovation, let’s just say the old adage, “scarcity drives ingenuity” seems to have taken hold.
So now that it is all out we can expect a slow depreciation of the exorbitant cost that has been put upon the AI revolution here in the United States and while Americans are lulled to sleep with Sports and Entertainment, the Chinese seem to continue to push the boundaries of innovation and advancement and have clearly positioned themselves to compete on many levels here. We aren’t sure where or what this will do to the industry but overall this is a major blow to the AI hype that needs constant capital flow to keep the current valuations and that is most likely going to be revalued over the coming weeks and months.
Ok as far as other news the BOJ rate hike was expected and quite a dud, with no real fireworks attached to it, this week we have the US Govt, issuing over $400bn in debt which include new 2s and 5s today. We also have the FOMC meeting where its widely expected that they keep the Fed Funds range at 4 to 4.25%. We do not see them cutting with the markets fully expecting a pause, but you never know! When we look at the US bond market we can see that the 30Y has fallen from its peak near 5%:
When we look at the 2Y which is a bit more controlled by the FOMC Fed Funds rate movements its basically at the same level it was a year ago with 4.40% being the ceiling for quite some time:
Also this week big earnings prints from TSLA, META and MSFT on Wednesday and APPL and Intel on Thursday after the close, so we will take a look at the options break-evens later in the week to see if it will give us any indication of option leaning directionality. Then on Thursday, economically we have Q1GDP print with Friday bringing the PCE or personal consumption expenditure numbers. So this week is very pivotal for the markets so we must watch our levels once again to see which crowd is in control the buyers or sellers.
Let’s take a quick look at the technical charts starting with the Nasdaq futures where the bears are back in control and we are trading below the 21608 level as the Nasdaq opens up down over 3% on the DeepSeek news. the 21pVWMA is first support and has been rejected again thus far:
As far as the SP500 futures, the 6042 level is this weeks key and we are trading right near there, but below it the sellers will be in clear control:
We would suspect that the SP500 would outperform the NQ here and we have highlighted this chart before, this one has been basing out for 2 months now:
Nvidia is getting pounded down 11.2% and is clearly in sell territory now below the $134 level:
Ok so we know the stories for this week, we know that this is a game changing moment and the trading PMs will be looking to offload some of the risks that are now embedded in the AI hype. We can see by early Monday’s action that this is indeed the case, but we aren’t sure if this will become systemic so lets see how retail handles all of this today and tomorrow.
Ok let’s take a quick look now at the Magnelibra MEGA8s data, last week the options hedge worked well and now the hedged side has a positive net change thus far as well. META was the big winner on Friday. The hedge for this week is still to be determined, we don’t put on hedges in down markets, we wait for a bounce, we may get it we may not but we probably don’t want to put a hedge on today given the move thus far but probably target the 525 area in the QQQs:
The market cap chart for the MEGA8s is rejecting the retest and will threaten the $19T level after today and the 50pMA will determine if the market can withstand rolling over:
As far as the MicroStrategy Tracker it is back in negative territory as our options adjusted equity price is down 20.28% since Dec1 putting the overall return at -3.02%:
As far as the Magnelibra CTA Markets Sentiment the Yen, Suisse and Canadian Dollar moved to neutral and the Aussie +1 as of Friday’s close:
As far as last weeks settles and 5/30 day changes, we rolled the Gold contract to April:
The Nikkei was the 5 day winner and Crude the loser with the 30 day Nat Gas the % based leader and the Euro Bund the loser:
Ok guys that is it for today, you know the themes now, DeepSeek is causing major reevaluations across Silicon Valley, we are certain its causing the US govt some concern as well. We know big tech has earnings coming out in the face of all this, this week, so lets just say, there will be a few chips withdrawn out of sheer prudence, look nobody went broke by taking profits, that we are assured of. So do the right thing and adjust your risk. Sometimes when you look at things from a risk perspective and not an alpha perspective you gain a different insight. When you have certain events happen, they can either be absorbed or they can have some unintended consequences and depending upon your overall goals, you should already know what your course of action should be. Ok till next time, cheers.
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