Quick Note
Markets in Meltdown Before the Open
I am traveling this week, so publication of After Hours notes will be lighter than usual. However, with markets in turmoil ahead of the U.S. Opening Bell, I wanted to provide a quick update.
As you have likely seen, AI competitor DeepSeek has acted as the catalyst. For months, the AI narrative has revolved around massive capital expenditure by the hyperscalers, with Nvidia as the primary beneficiary. For instance, in Facebook’s recent earnings call, they raised their AI capex estimate from $50 billion to $65 billion. The underlying question now is whether much of this spending has been poorly allocated.
That said, DeepSeek is merely the trigger. Today’s market move is more about the unwinding of extreme positioning and leverage than any rational assessment of DeepSeek’s actual impact. As I emphasized in the latest Weekly Edge, equities were approaching short-term overbought conditions and were primed for correctional consolidation.
While I expected an unwind, I will admit the source of the catalyst caught me off guard. In a week packed with macro events and an FOMC meeting, it is ironic that the spark came from left field, entirely within the private sector.
We’re now approaching a level where buying the dip could make sense. S&P futures are nearing the lower bound of the monthly channel; refer to Weekly Edge for precise levels. My pivot level remains 5,920. I expect it to trade this week (perhaps even today) and I am preparing to position accordingly. I remain bullish above this level and bearish below.
Key Notes:
When an opening gap is this large, the typical cash market impulse at the open tends to move in the gaps direction (lower) due to forced selling and margin calls.
Immediate opportunity: Bonds. I have already purchased 111-strike puts today, as the duration rally is not driven by inflation or growth expectations but by mechanical flows. Over the week, I plan to sell a lower-strike put against this position to create a zero-cost spread. My base case remains strong economic data and a hawkish FOMC.
I am also evaluating a buy/write strategy due to favourable pricing, though I will wait for confirmation that we’re holding above the 5,920 pivot before proceeding.
The only other trades I’ve made today involve managing hedges I entered last week, anticipating a reversal risk.
If you have questions, feel free to tag me in a reply. Stay sharp, and good luck out there.