The week started with a wild ride when DeepSeek created a bizarre “deep sink” day in the stock market. NVIDIA Corp. (NVDA) was one of the most actively traded stocks, closing lower by 16.97%. The stock lost $593 billion in market cap, which, according to Barron’s, is the most market value a stock has lost in a single day. There was a lot of talk suggesting the semi-bubble may have burst.
The release of DeepSeek R1, an AI tool that appears to be much more efficient than other large language models caused NVDA’s stock price plunge. This raises questions about the need for expensive hardware that NVDA and its competitors provide. Reduced hardware needs would mean less spending on AI infrastructure, impacting employment and, ultimately, the economy.
Despite the massive selloff in semiconductor stocks, other areas didn’t feel as much pain. The Dow Jones Industrial Average ($INDU) closed higher, the S&P Equal Weighted Index ($SPXEW) closed up 0.02%, and seven of the 11 S&P sectors closed in the green. The top-performing sectors were Consumer Staples, Health Care, and Financials (see image below). Out of the Mag 7 stocks, Meta Platforms (META), Apple (AAPL), and Amazon (AMZN) closed higher. These companies would benefit greatly from the implementation of AI tools.
However, Monday’s selloff may have been overhyped because, on Tuesday, the narrative shifted. The chart below shows how the S&P 500 ($SPX) bounced off its 21-day exponential moving average (EMA).
FIGURE 1. S&P 500 BOUNCES BACK. A bounce off its 21-day EMA and improving breadth suggests the S&P still has legs.Chart source: StockCharts.com. For educational purposes.
Interestingly, the NYSE New 52-week highs outnumbered the New 52-week lows on Monday. This should have indicated that Monday’s selloff could be a short-lived overreaction.
Overall, the uptrend in the S&P 500 has not suffered much harm, but considering it’s close to its top, a little hesitancy to continue higher is healthy.
The Nasdaq Composite still has a little work to do before confirming its bull trend. An upside follow-through and improving breadth would confirm a bullish trend (see chart below).
FIGURE 2. NASDAQ COMPOSITE NEEDS A LITTLE MORE UPSIDE FOLLOW-THROUGH. Improving breadth indicators and a continuation to the upside would confirm the Nasdaq’s bullishness.Chart source: StockCharts.com. For educational purposes.While the index broke above its downward-sloping trendline connecting the lower highs, Monday’s price action broke that trajectory. Investors should look for the Nasdaq to resume an uptrend—a series of higher highs and higher lows. The Nasdaq Composite Bullish Percent Index (BPI) is shy of 50, about 45% of Nasdaq stocks are above their 200-day moving average, and the Nasdaq Advance-Decline Line is still not convincingly bullish. The Nasdaq is still at a crossroads, but it has a lot of damage to overcome.
The Dow Jones Industrial Average ($INDU), which was running behind, has caught up with the other indexes and is getting very close to its all-time high. Its breadth is also strengthening—a respectable BPI of 63.33, a rising Advance-Decline Line, and 25% of Dow stocks above their 200-day simple moving average.
FIGURE 3. DOW JONES LEADS THE INDEXES. The Dow is looking the most bullish of the three indexes.Chart source: StockCharts.com. For educational purposes.
The Bottom Line
Investors should always worry about protecting their portfolios, so it shouldn’t be surprising that negative news sent investors into a panic-selling mode. Profit-taking from a strong stock performer such as NVDA is a natural reaction. After getting slammed beyond belief on Monday, NVDA’s stock price recovered on Friday, closing higher by 8.82%. It hasn’t recovered all its losses, but Tuesday’s move is encouraging.
Wednesday will be an eventful day. There’s the Fed meeting and Tech earnings are in full swing. Microsoft Corp. (MSFT), Meta Platforms (META), and Tesla, Inc. (TSLA) report quarterly earnings after the close. META closed at an all-time high, MSFT closed higher and recovered from Monday’s loss, and TSLA closed slightly higher. Will the upward move continue?
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.