Coiled Spring Captial MR 1/26/24

Deep Six! - This Week's Analysis...

Table of Contents

Introduction

Did DeepSeek Just Deep Six the Stock Market?

If you’ve missed the weekend buzz, DeepSeek—a Chinese AI startup—has reportedly developed an AI competitor to OpenAI’s ChatGPT. The kicker? It not only outperforms ChatGPT on key benchmarks but does so at a fraction of the cost.

This breakthrough could disrupt the entire AI spending ecosystem. If DeepSeek’s technology renders expensive high-speed GPUs less essential, it may lead to a significant pullback in AI infrastructure spending. While the development seems benign on the surface, it threatens to undercut the AI-driven bull case that has propelled certain sectors of the market to new highs.

The market reaction was swift and telling. Late last week, news of DeepSeek’s advancements sparked a reversal in stock gains, with semiconductors taking the brunt of the sell-off.

We’re not here to weigh in on whether DeepSeek will fundamentally alter the AI arms race, but the implications are undeniable. The stock market, already priced at the upper range of historical valuations, leans heavily on the AI narrative—particularly on juggernauts like NVIDIA (NVDA). A reallocation of corporate budgets away from AI infrastructure could significantly impact the market’s trajectory.

As if the market needed more to worry about. Just two weeks ago, it was grappling with fears of re-accelerating inflation and potential disruptions from Trump’s policy stance, erasing post-election gains. Then, moderating inflation data and Trump’s softened tariff rhetoric—coupled with his announcement of the Stargate initiative—catapulted the SPX to new all-time highs.

Welcome to Trump 2.0: a landscape riddled with landmines where volatility is the only certainty.

This week, the drama intensifies with the FOMC meeting and key earnings reports from the Mag 7. It’s shaping up to be a week where investors may want to grab some popcorn and watch the show unfold.

For most active investors, sitting on the sidelines isn’t an option. Fourth-quarter earnings season has started strong, with companies beating estimates by an average of 8.7% through Thursday. Continued robust earnings and a dovish FOMC could overshadow near-term concerns, making this week pivotal.

Buckle up—it’s going to be an Oscar-worthy week in the markets.

Let’s dig into the charts.

Subscribe to Premium to read the rest.

Become a paying subscriber of Premium to get access to this post and other subscriber-only content.

Already a paying subscriber? Sign In.