DeepSeek Launch: A Short Selling Boon for AI Stocks

The launch of DeepSeek's R1 large language model on January 27, 2025, sent shockwaves through the global stock market, particularly in the AI and tech sectors. The emergence of this high-performance, cost-efficient AI model from a Chinese startup raised questions about the demand for more data centers and newer, expensive high-performance chips. This, in turn, sparked a significant shift in market sentiment and investor psychology, driving a short selling boom in the AI and tech sectors.



The launch of DeepSeek's R1 model sparked uncertainty and fear among investors, leading to a surge in short selling activities. Investors, particularly those with long positions in AI stocks, turned to short selling as a way to hedge their portfolios against potential losses. The perceived threat to the dominant AI players and their stock prices made short selling an attractive strategy. Additionally, the fear of missing out (FOMO) and the desire to capitalize on perceived market inefficiencies drove investors to engage in short selling. The herd mentality also played a role, as investors followed the lead of others in the market, further fueling the short selling boom.



The short selling activities significantly influenced the overall market performance and volatility in the AI and tech sectors. On Monday, January 27, shares of Nvidia (NVDA) tumbled 17%, their biggest one-day drop since March 2020. This sell-off was triggered by concerns that DeepSeek's efficient AI models could reduce the demand for Nvidia's most sophisticated chips, which are used for AI training. The chip giant's market cap shrank by nearly $590 billion, the largest loss of market value for a single company on record. This sell-off contributed to the overall market volatility and negatively impacted the AI and tech sectors.

The week of January 27 was marked by volatility in AI stocks as investors reckoned with the implications of DeepSeek's high-performance, cost-efficient AI model. Semiconductor stocks, including Nvidia and Broadcom, sold off on Monday, followed by a modest rebound. However, the damage was still evident when markets closed on Friday. This volatility was driven by short selling activities and uncertainty about the future demand for AI infrastructure and hardware.

Exchange-traded funds focused on AI stocks showed significant divergence in performance, underscoring the importance of understanding a thematic fund's strategy. Some funds, like the Global X Artificial Intelligence & Technology ETF AIQ, attracted strong inflows toward the end of the week, reflecting continued investor confidence in the sector's long-term potential. However, other funds, such as the VistaShares Artificial Intelligence Supercycle ETF AIS and Pacer Data and Digital Revolution ETF TRFK, suffered losses due to their high exposure to AI hardware industries, which were negatively impacted by short selling activities.

In conclusion, the launch of DeepSeek's R1 large language model had a significant impact on short selling activities in the AI and tech sectors, particularly in semiconductor stocks. The market reaction to DeepSeek's announcement was swift and severe, driving a short selling boom that influenced the overall market performance and volatility in the AI and tech sectors. As the AI industry continues to evolve, investors should remain vigilant to potential market disruptions and adjust their strategies accordingly.