Get ready for “DeepSeek Decline Part II.”
The stock market got hit hard on Monday. At one point, the S&P 500 was down 130 points. The Nasdaq 100 lost as much as 5%. And, the world’s most popular stock, Nvidia (NVDA) lost $600 billion in market capitalization.
The financial media reported the cause of this minicrash was the unveiling of DeepSeek – a better, cheaper, and more efficient form of artificial intelligence out of China.
But, there’s more to it than that…
Yes, DeepSeek may have been the match that lit the stock market bonfire. But, stocks would not have been so vulnerable to a large decline if investor sentiment hadn’t been so overwhelmingly optimistic.
A Contrary Indicator
For example, last Friday, the CBOE Put/Call ratio (CPC) closed at 0.76. That’s an indication of investor exuberance, which often warns of a potential decline.
The CBOE Put/Call (CPC) ratio measures investor sentiment (a contrary indicator) by taking the total volume of put options traded on a given day and dividing it by the total number of call options.
Whenever the ratio spikes above 1.20, it indicates traders are rushing to buy put options and make bearish bets – which is bullish from a contrarian standpoint. When the ratio drops below 0.80, traders are aggressively buying call options and betting on an upside move – which is ultimately bearish.
For example, last August – after the S&P 500 had fallen 9%, and it looked like the world was ending – the CPC hit 1.28. That coincided with a bottom in the stock market.
In late November, after the S&P had rallied 300 points on the heels of President Trump’s victory, the CPC hit 0.78. The S&P 500 dropped 250 points just a few days later.
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So, it’s probably worth noting the CPC closed at 0.72 on Wednesday.
In other words, despite all of the volatility this week, traders were still jumping over themselves to buy call options.
It’s rare for the stock market to sustain any sort of a rally when the CPC is this low. So, while investors might be breathing a sigh of relief that the market has rallied back from the DeepSeek decline, traders ought to be looking over their shoulders right here.
The CPC indicator is suggesting there’s another short-term decline in front of us.
Best regards and good trading,
Jeff Clark
Editor, Market Minute