China just rattled the market.
Last week, DeepSeek—a Chinese artificial intelligence (AI) startup—announced it had created a high-performance AI model on a shoestring $5.6 million budget.
That’s a fraction of what leading US AI companies have spent to develop models like OpenAI.
The knee-jerk reaction was to sell off all AI infrastructure names on the news.
Everything from chipmakers to AI energy stocks got slammed.
Nvidia (NVDA)—the world’s largest semiconductor company—plunged 17% on Monday. Broadcom (AVGO)—another leading AI semiconductor name—also nosedived 17% on the news.
Leading AI energy names like Constellation Energy (CEG), Vistra Corp. (VST), and GE Vernova (GEV) also got slammed, with all three falling more than 20% on Monday. Last week, these were the three top-performing S&P 500 stocks!
Needless to say, Monday’s AI unwind blindsided many traders—including myself.
There weren’t any major warning signs in the charts.
AVGO, CEG, VST, and GEV all recorded their highest weekly closes ever on Friday. They were among the strongest stocks in the entire market.
Stocks don’t typically crash from all-time highs. They crash once they’ve entered downtrends.
So, what fueled this? Essentially, the DeepSeek news is a major breakthrough. It demonstrated that top-flight AI models can be created for less than most anticipated (even if DeepSeek greatly underreported the true cost of its AI’s development).
Because of this, many believe that companies won’t need to spend nearly as much money on chips, data center infrastructure, and energy to build highly competitive AI models, as previously anticipated.
But it’s not all bad news. DeepSeek has ignited powerful rotations into other areas of the market, with software stocks emerging as the clear winners.
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Yesterday, the iShares Expanded Tech-Software Sector ETF (IGV) closed the day up 2.8%. And many individual software names are performing even better:
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Gitlab (GTLB)—up 12.3%
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Datadog (DDOG)—up 6.8%
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Zoom (ZM)—up 8.1%
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Elastic (ESTC)—up 11.8%
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Confluent (CFLT)—up 7.7%
This makes perfect sense.
If companies don’t need to invest nearly as much money on training AI models, their CapEx—money spent on assets that benefit businesses long term—should be lower. And those savings should lead to greater profits.
Basically, the thinking is that software companies can now do a lot more with less. That’s why software stocks are in the driver’s seat right now.
Many of the charts of leading semi and AI infrastructure stocks are broken as a result of the DeepSeek news. As a swing trader, these are not the kinds of setups I like to buy.
I’d much rather own stocks that are still in uptrends. And right now, the best setups I’m seeing are in software stocks.
If you haven’t joined us inside Express Trader yet, I recommend the three strongest stocks to trade each week (new guidance released every Monday morning). Go here to join and start getting my handpicked trades every week.
Justin Spittler
Chief Trader, RiskHedge
