Get ready for “DeepSeek Decline Part II.”<\/p>\n
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\u2019s most popular stock, Nvidia (NVDA) lost $600 billion in market capitalization.<\/p>\n
The financial media reported the cause of this minicrash was the unveiling of DeepSeek \u2013 a better, cheaper, and more efficient form of artificial intelligence out of China.<\/p>\n
But, there\u2019s more to it than that\u2026<\/p>\n
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\u2019t been so overwhelmingly optimistic.<\/p>\n
For example, last Friday, the CBOE Put\/Call ratio (CPC) closed at 0.76. That\u2019s an indication of investor exuberance, which often warns of a potential decline.<\/p>\n
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.<\/p>\n
Whenever the ratio spikes above 1.20, it indicates traders are rushing to buy put options and make bearish bets \u2013 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 \u2013 which is ultimately bearish.<\/p>\n
For example, last August \u2013 after the S&P 500 had fallen 9%, and it looked like the world was ending \u2013 the CPC hit 1.28. That coincided with a bottom in the stock market.<\/p>\n
In late November, after the S&P had rallied 300 points on the heels of President Trump\u2019s victory, the CPC hit 0.78. The S&P 500 dropped 250 points just a few days later.<\/p>\n
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