Michael Burry, the investor famed for predicting the 2008 subprime crisis, is warning that the market's pain trade may persist much longer.
The real-life inspiration for "The Big Short" laid out a bearish "Bloody October" scenario: if the "Magnificent Seven" US megacaps follow semiconductor stocks lower while bond yields simultaneously decline, his conviction in that outcome will only grow stronger.
Speaking in a Substack chat, he said: "When it comes to the pain trade, my view is that pain trades turn into fatal trades, because they tend to last a very long time."
Falling Bond Yields Fail to Lift Tech Stocks
After US September CPI data was released on Wednesday, Treasury yields spiked instantly. The 10-year Treasury yield briefly rose above 5.30% before rapidly retreating, closing below 5.20%, as Treasuries served as a safe haven and yields consequently fell.
However, the decline in Treasury yields failed to benefit tech stocks 鈥?the Nasdaq Composite closed down 1.88% on Wednesday, while the Nasdaq 100 fell 2.02%.
Burry noted this phenomenon deserves caution. He said: "Although the prevailing view is that falling yields equal good news for stocks, the current pain trade is still lower rates and a falling Nasdaq."
The next thing to watch is whether weakness in semiconductor stocks spills over into the "Magnificent Seven." Burry said: "We have already seen semiconductors fall alongside rates, but if we ultimately see the 'Magnificent Seven' also fall with rates, then that will further strengthen our conviction on 'Bloody October.'"
The "Magnificent Seven" comprises Apple (AAPL.US), Microsoft (MSFT.US), Alphabet (GOOGL.US), Amazon.com (AMZN.US), NVIDIA (NVDA.US), Meta Platforms (META.US) and Tesla (TSLA.US).
Burry stressed that this group currently occupies the market's "last man standing" position, and noted that recent action in semiconductor stocks bears similarities to market conditions around the 2000 tech bubble. He also mentioned that the S&P 500 could be forming a failed breakout.
Selling Pressure Tests Wall Street's Long-Standing Calm
Burry pointed out that after trading volume fell to a 20-year low, market activity has picked up. Volume in the SPDR S&P 500 ETF (SPY) ran about 15% above average, while volume in the Invesco QQQ Trust (QQQ) was about 25% higher. The S&P 500 was down nearly 1% at the time, and declining stocks accounted for 79% of volume on the New York Stock Exchange.
He also noted that since 2020, the S&P 500 has recorded its longest stretch without a single-day decline of 1%. The NYSE had previously gone nearly a year without a session in which declining stocks made up at least 80% of total volume 鈥?the longest such calm period on record, with records dating back to 1996.
In addition, Burry cautioned that slowing inflation does not mean the high price levels households already face will come back down. He gave the example of a bag of chips rising from $5.99 to $6.19, when not long ago it cost only $1.99 to $2.49. He argued that even modest increases still weigh heavily when prices are already elevated.
He said: "Pushing that false price ceiling higher and higher is painful."
Betting the Market Is About to Top Out
Burry's latest comments came just after he disclosed his short positions. He said almost all of his short exposure was established through put options on the Nasdaq 100 and the VanEck Semiconductor ETF (SMH). Both positions carried strike prices 20% below the underlying assets' prices at the time, with expiration dates in April 2027 and June 2027, respectively.
He also retained single-stock puts on Oracle (ORCL.US), Palantir (PLTR.US), MetLife (MET.US) and Caterpillar (CAT.US).
Burry said: "I think there are zero to nine months until a major market top." He described the semiconductor fund as a concentrated bet aimed at shorting stocks he believes are overstretched in valuation, with NVIDIA accounting for nearly one-fifth of the fund's total holdings.
His bearish call is partly built on a phenomenon: even as major indexes sit at record highs, market breadth is weakening internally. Earlier this month, Burry calculated that 55% of S&P 500 constituents were down at least 20% from their respective highs, while more than 80% were down at least 10%. He compared this divergence to market conditions at the peak of the tech bubble.
He said: "Market tops tend to form during this kind of denial phase. This phase can last six to nine months, or even more than a year."
Still, Burry acknowledged that stocks could rally substantially before eventually turning lower. In a recent weekend post, he said: "The final months of a bull market can be absolutely insane. After all, the indexes have broken out and hit new highs, and it is entirely possible for a bull market to surge rapidly in a short period."
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