Situational awareness is “the ability to perceive your environment, understand what those surroundings mean, and project how they will change in the near future.”
How ironic that a hedge fund called Situational Awareness was forced to liquidate highly leveraged positions to cover margin calls.
How to avoid one of those “I lost everything” horror stories
Table of Contents
The Big Picture
I’m guessing you saw the clown at Situational Awareness? Listen, I love young people. They are our future. But guess what?
Leopold Aschenbrenner got smoked. He got liquidated. Situational awareness applies to using leverage, too.
To summarize:
- He was over-leveraged in all the AI-related stocks
- He got margin calls because of small pullbacks
- He got liquidated
- That created even more selling pressure
When you have a big fund like that and it gets liquidated, a bunch of shares get dumped on the market, which creates a short-term dip.
It’s basic supply and demand. You got more sellers (more supply) than buyers. That’s what caused the sell-off in tech stocks.
If you want to be a successful trader, this is important to understand.
Why?
Because the lesson doesn’t just apply to hedge funds. It applies to everyone, including you and me.
The Leverage Game
Look at what happened with Bitcoin. It went from over $100k to $60k. Why did it pull back to multi-year support?
It was all the idiots on Hyperliquid, trading with 100x leverage, who chased the top and ruined the move. The market has to work them out.
It’s the same thing that happened in the Korean market. Everyone was trading with ridiculous amounts of leverage.
Whether it’s Korea, Bitcoin or Situational Awareness…
All of these sell-offs were created by leverage.
As always, there’s a lesson here…
You Can Be Right and Still Get Smoked
It’s wild to think that Leopold Aschenbrenner was right across the board.
People are going to look back and say this kid nailed everything. But because he was so leveraged, those little pullbacks smoked him.
Ken Griffin’s hedge fund, Citadel Securities, scooped up the Situational Awareness book for pennies on the dollar. We’re talking about Sandisk (NASDAQ: SNDK), CoreWeave (NASDAQ: CRWV), Bloom Energy (NYSE: BE), and a bunch of other AI-related stocks.
And now? We’re going to see all those stocks return to their trend.
My Take
So many people were worried about the semiconductors. They were hiding under their beds crying “AI bubble.”
Through all of this, I never changed my opinion.
I see this as the greatest technology in the history of mankind. I kept wondering how you could flip bearish on Micron (NASDAQ: MU) or SNDK. It didn’t make any sense. And now we know why.
My friend, we’ve seen this again and again.
You can be right, but if you’re overleveraged, or you’re trading oversized positions, you get shook out. You can be directionally right, but the small pullback smokes you.
My advice: don’t use leverage unless you know what you’re doing. In the beginning, don’t use it at all.
Leopold Aschenbrenner had no prior investment experience. Smart guy, knows AI, just had no situational awareness when it comes to the markets. Expensive lesson.
Watchlist
I remember seeing Bloom Energy (NYSE: BE) years ago when it was around $9 a share. Back then I thought it was really cool technology and it’s only gotten better.
Since then, the stock has gone on quite a run:
BE, 1-year, daily candles
BE is also one of those stocks that got affected by the Situational Awareness forced liquidation.
Look what it did to end the week:
BE, 2-day, 5-min candle, tapped the MR
I like this for a swing trade. Look for breaks above major resistance near $233.
On My Radar
- “My AI outhacked your AI.” Higgins, are you paying attention?
- In case you missed it, last night’s Sunday Market Brief
- University of Michigan Consumer Sentiment jumped +11.5% from June.