GoKawiilThere are thousands of articles and opinion pieces on Situational Awareness: what happened, what went wrong, and so on. We're less interested in exploring that here as you can find lots of deep dives and many more to come, we're sure.
Contrary to what others say, we believe that Situational Awareness struggled this past week because of forces pushing prices down, but it also benefited from those same forces when its asset prices were skyrocketing in value over the past ~18 months. Situational Awareness is more of a canary-in-the-coal-mine situation than a divergence from a positive trendline. SA's rise and fall shows that the AI-related stock market is over-leveraged and over-concentrated, and will most likely lead to significant volatility in the coming months. Call it the KOSPIfication of the NASDAQ.
Here, we'll explore why Citadel buying SA's publicly traded assets is neither bullish nor bearish, and why the same market forces (excitement, leverage, overconfidence) not only drove SA's asset prices down this past month, but also were the reason for them going up. This is all in the context of a reflexive trend, and one aligned with our concerns around US household, retail, and hedge fund leverage —the deleveraging of which, and the fear associated with loss of paper wealth, would lead to a significant negative feedback loop for AI assets.
Citadel's purchase is not a bullish move
Some writers have argued that Citadel's purchase not only saved the market, but signals Citadel's own confidence in the AI trade. This is incorrect. Citadel might be using this to cover shorts, sell put options, or resell the securities directly to retail traders, given its market-making relationships with firms like Robinhood. Given Citadel's size and diversity of business offerings, from running funds through to market making, it could very well be a combination of these.
A key benefit of the purchase was that it was done as a block purchase; SA did not submit a set of sell orders via its broker to liquidate itself, unlike the rumor that SA was selling off Intel after its earnings . The block trade serves to stem a further price shock, and could even allow Citadel and SA to avoid pricing individual positions or companies.
For all we know, it might have been a form of short covering for Citadel, or maybe arresting a decline in some of its or its clients' holdings… Maybe a strategy to manage price declines not unlike what we saw in China about two weeks ago .
Our goal is not to speculate on Citadel's objectives, but rather to simply say there are many interpretations that do not signal this as a positive long-term view on AI stocks held by SA.
The forces that destroyed SA were also what generated its 4×+ return
While SA blamed short sellers betting against its own positions (and thus Citadel could be helping with short covering, as per above!), these same forces are likely what propelled SA's skyrocketing returns in the first place.
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