Situational Awareness and the Impending Market Volatility

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Research<br>Situational Awareness and the Impending Market Volatility

By Wojciech Gryc &middot; August 2, 2026 &middot; 6 min read

There are thousands of articles and opinion pieces on Situational Awareness: what happened,<br>what went wrong, and so on. We're less interested in exploring that here as you can find lots<br>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<br>of forces pushing prices down, but it also benefited from those same forces when its asset<br>prices were skyrocketing in value over the past ~18 months. Situational Awareness is more of a<br>canary-in-the-coal-mine situation than a divergence from a positive trendline. SA's<br>rise and fall shows that the AI-related stock market is over-leveraged and over-concentrated, and<br>will most likely lead to significant volatility in the coming months. Call it the KOSPIfication of<br>the NASDAQ.

Here, we'll explore why Citadel buying SA's publicly traded assets is neither bullish nor<br>bearish, and why the same market forces (excitement, leverage, overconfidence) not only drove<br>SA's asset prices down this past month, but also were the reason for them going up. This is all<br>in the context of a reflexive trend, and one aligned with our concerns around US<br>household, retail, and hedge fund leverage[1]—the<br>deleveraging of which, and the fear associated with loss of paper wealth, would lead to a<br>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<br>Citadel's own confidence in the AI trade. This is incorrect. Citadel might be using this to<br>cover shorts, sell put options, or resell the securities directly to retail traders, given its<br>market-making relationships with firms like Robinhood. Given Citadel's size and diversity of<br>business offerings, from running funds through to market making, it could very well be a<br>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<br>sell orders via its broker to liquidate itself, unlike the rumor that SA was selling off Intel<br>after its earnings[2]. The block trade serves to stem a<br>further price shock, and could even allow Citadel and SA to avoid pricing individual positions or<br>companies.

For all we know, it might have been a form of short covering for Citadel, or maybe arresting a<br>decline in some of its or its clients' holdings… Maybe a strategy to manage price<br>declines not unlike what we saw in China about two weeks ago[3].

Our goal is not to speculate on Citadel's objectives, but rather to simply say there are many<br>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&times;+<br>return

While SA blamed short sellers betting against its own positions[4] (and thus Citadel could be helping with short covering, as per<br>above!), these same forces are likely what propelled SA's skyrocketing returns in the first<br>place.

Figure 1: Cumulative return of an anonymized thematic ETF and its own price impact on<br>its holdings. [original]

Philippe van der Beck (from Harvard Business School), Jean-Philippe Bouchaud (from Capital Fund<br>Management, CFM), and Dario Villamaina (from CFM) explored how thematic ETFs can benefit from<br>their own success by driving the price of their assets up[5]. The details of the paper are outside the scope of this note,<br>but there are a few forces at play. For example, a successful ETF is likely to get more<br>investors buying its shares, and these influxes of cash allow the ETF's portfolio managers to double down on their<br>positions. This can lead to a positive feedback loop around the ETF's assets, thus driving up<br>the prices of earlier purchases and leading to a net gain on the investments. This is particularly<br>true for illiquid stocks and concentrated industries (both of which SA was focusing on), as<br>there are fewer shares to go around. Figure 1 shows one of the funds they investigated, whose path of price increases and asset growth<br>looks strikingly like SA's—up about 400%, then a significant decline.

While SA was a hedge fund, the fact that it avoided the use of actual hedging strategies and its<br>high correlation with other public ETFs (which also avoid hedging strategies) like the iShares<br>Semiconductor ETF (SOXX) mean it likely acted more like a public ETF than a hedge<br>fund.

In short: our argument here is that regardless of whether there was a targeted short seller<br>campaign against SA, SA exhibited the sort of growth and decline that you would expect from an<br>over-leveraged and unhedged index tracking a megatrend. It was a beneficiary and victim of its own<br>success, and there are likely other such risks lurking in the public equities AI...