Is It Time to Break Free from AI Stock Mania?

This past week saw significant market moves, primarily driven by concerns around artificial intelligence (AI) and the global tech landscape. The recent Nvidia selloff on Monday caught many traders off guard, but the quick V-shaped recovery proved to be a major trading opportunity.

China’s ongoing AI development has intensified competition, leading to a dispersion trade where traders were long on Nvidia’s implied volatility and other AI Stocks while shorting the S&P 500’s implied volatility. This divergence created one of the biggest trade opportunities since 2020.

S&P 500 1m IV (lhs) vs NVDA 1m IV (rhs).

Year-to-Date Asset Performance

• Stocks: S&P 500 is up 2.7%, though tech stocks have struggled. European markets, however, are outperforming, with the Euro Stoxx 50 up 8% and the DAX nearly 10%.
• FX: The U.S. dollar, after a strong start, has stabilized, with other currencies catching up.
• Commodities: WTI and copper both saw gains of 6%.

Weekly Performance Highlights

• S&P 500: Down 1% for the week, though it recovered from a 3-4% drop on Monday.
• European markets: Strong performance despite tech weakness.
• U.S. dollar: Slightly stronger, with volatility seen across multiple asset classes.

Industry & Sector Performance

A key trend this week has been the shift away from tech and semiconductors towards more defensive sectors:

• Gold miners & Consumer Staples: Strong gains due to a rebalancing in portfolios.
• Semiconductors & Nvidia: Down 7%, with Nvidia’s weakness being a major factor.
• Healthcare & Consumer Staples: Outperformed as defensive plays gained traction.

With the S&P 500 tech sector underperforming, investors have rotated into Consumer Staples and Healthcare, leading to a broader sector rebalancing.

Rates & Economic Outlook

• China: Markets closed for Lunar New Year.
• U.S. 10-Year Treasury Yield: Now at 4.5%, down from recent highs of 4.7-4.8%.
• Federal Reserve Policy: Expecting two 25 basis point cuts in 2025.

Volatility remains compressed despite tech sector weakness. The VIX hit 22% on Monday’s selloff but has since settled at 16%.

Technical Analysis & Trade Setups

• S&P 500 & Nasdaq: Struggling to make new highs but holding an overall uptrend.
• Gold: Making new all-time highs as investors seek alternative hedges.
• Amazon: Strong move after its CEO Jeff Bezos finished selling off significant stock positions.
• Earnings Season: Key names reporting this week include Google, Amazon, and Palantir.

Rotation is evident, with traders moving from high-growth sectors to more stable industries. Meanwhile, retail investors continue buying Nvidia dips, maintaining a bullish outlook despite recent pullbacks.

Geopolitics & Market Catalysts

• U.S. Tariffs: The White House confirmed new tariffs on Mexico (25%), China (10%), and Canada (25%), leading to minor market selloffs.
• Earnings & Macro Data: This week’s key economic releases include ISM Manufacturing, ISM Services, and Non-Farm Payrolls.
• Trump Administration: More expected policy shifts could impact market sentiment.

  

  Earnings Calendar. Source: Earnings Whispers

Market Seasonality & Strategy

• Historically, the market sees a 1% gain from late January to mid-February.
• Post-options expiry in mid-February, markets tend to slow down.
• Weekly straddle pricing suggests ±1.6% expected moves, higher than last week’s estimate.

S&P 500 Seasonality. Source: GS.

Community Updates & New Offerings

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We’ve recently welcomed a new mentor, Étienne, who will be providing additional mentoring sessions. If you are interested in joining, send us an email for more details!

Final Thoughts

Last week’s Nvidia selloff and subsequent recovery highlighted the impact of AI competition on markets. We are in the middle of earnings season, with several major tech firms set to report. Meanwhile, macroeconomic events and geopolitical shifts continue to shape market movements. Stay tuned for more insights next week!

Have a great trading week!

Greg

greg@duponttrading.com