The unwind of Situational Awareness isn't the only reason the AI trade is back

Breaking news from the markets: It was a clearing event after all. It's been just over a week since the forced unwind of the high-flying Situational Awareness hedge fund, and the artificial intelligence trade is now standing on solid ground after a turbulent July battered the market's old leaders. The best part is that the hedge fund's reckoning last Thursday isn't the only reason for the sustained reversal of fortunes.

The biggest winners of late in our portfolio tell the story of a sturdier AI trade: Microsoft , Corning , Eaton , Intel and Amazon . This covers the performance since the July 29 close through Thursday of this week. The entire top 10 consists of AI winners, in some form or another.

Economic Details

Prior to the Situational Awareness meteor, nine of the 10 stocks were lower during the month of July. The lone exception was Microsoft , which had been crushed in June and had started to perk up into July. Jim Cramer figured this may be the case on the morning of July 30, as reports emerged that Situational Awareness was facing a margin call and its brokers were seeking buyers for its public stock portfolio.

The fund, run by former OpenAI researcher Leopold Aschenbrenner, was using a lot of borrowed money to make bullish bets on AI infrastructure providers, including chipmakers, and to bet against companies with perceived disruption risk, like enterprise software vendors. In recent weeks, those previously successful trades went wayward — hardware names were falling, and software was rising — culminating in the forced unwind. "I have always believed that when you clear out the people who have to sell, like this gentleman, you get a bottom," Jim said before the market opened.

"This is a clearing event ... because he's not the only one. " The market ripped higher last Thursday, with semiconductor stocks and data center suppliers soaring, while the rebounding software group took a breather.

Analyst Views

But the comeback for stocks like networking cable maker Corning and chipmaker Intel didn't stop there because the news that followed reinforced the notion that the AI buildout is alive and well. That has given investors the confidence to step back into stocks that looked like damaged goods just a few weeks earlier. We've done the same , buying more of Corning, Intel and semiconductor materials supplier Qnity Electronics this week.

On Thursday, we also added memory-chip maker Micron Technology to our Bullpen watchlist . Of course, some of the AI winners grew to become overheated in late June and were due for a pullback anyway. Speculation that perhaps the Federal Reserve could hike interest rates at its late July meeting added to the profit-taking last month.

But the revelations from Situational Awareness ultimately put the past few weeks of trading in a different light. In certain cases, non-fundamental forces were likely at play to the upside — and to the downside. Then came the earnings reports, which have helped support most of our top 10 recent winners beyond just last Thursday's session.

Economists are analysing what the news means for the markets.