"Big Short" Burry Issues Another US Stock Market Warning: If the "Magnificent Seven" Follow the Decline and Bond Yields Fall, Wall Street May Face a "Bloody October"

Investor Michael Burry, known for accurately predicting the 2008 subprime mortgage crisis, warns that the market's pain trade may continue. The real-life protagonist of the film "The Big Short" has outlined a bearish "Bloody October" scenario: if the "Magnificent Seven" follow semiconductor stocks lower and bond yields fall in tandem, his conviction in this scenario will strengthen further. "When it comes to the pain trade, my view is that the pain trade becomes the fatal trade, because they tend to last a long time," he said in a Substack chat. Bond Yields Fall, but Tech Stocks Fail to Get a Boost After the release of U.S. September CPI on Wednesday, Treasury yields spiked instantly. The 10-year Treasury yield briefly rose above 5.30%, but then fell sharply, closing below 5.20%, as Treasuries played a safe-haven role and Treasury yields consequently declined. However, the drop in Treasury yields failed to benefit tech stocks the Nasdaq Composite closed down 1.88% on Wednesday, while the Nasdaq 100 closed down 2.02%. Burry pointed out that this phenomenon is worth watching. "While the prevailing market view is that falling yields equal good news for stocks, the current pain trade remains lower rates and a falling Nasdaq," he said. What needs to be watched next is whether weakness in semiconductor stocks will spread to the "Magnificent Seven." "We have already seen semiconductor stocks fall in tandem with rates, but if we ultimately see the 'Magnificent Seven' also fall with rates, that will further strengthen our 'Bloody October' thesis," Burry said. The "Magnificent Seven" includes Apple Inc. (AAPL.US), Microsoft Corporation (MSGT.US), Alphabet Inc. Class C (GOOGL.US), Amazon.com, Inc. (AMZN.US), NVIDIA Corporation (NVDA.US), Meta Platforms (META.US), and Tesla, Inc. (TSLA.US). Burry emphasized that this group currently occupies the position of the market's "last man standing," and noted that the recent performance of 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 noted that market trading activity has picked up after volume fell to a 20-year low. Volume in the SPDR S&P 500 ETF (SPY) was about 15% above average, while volume in the Invesco Nasdaq 100 ETF (QQQ) was about 25% higher. The S&P 500 was down nearly 1% at the time, while declining stocks accounted for 79% of volume on the New York Stock Exchange. He also pointed out that since 2020, the S&P 500 has recorded its longest stretch without a single-day decline of 1%. The New York Stock Exchange had previously gone nearly a year without a day in which declining stocks accounted for at least 80% of total volume the longest such period of calm on record, with records dating back to 1996. In addition, Burry cautioned that slowing inflation does not mean the already-high price levels households face will come back down. As an example, he noted that a bag of potato chips rose from $5.99 to $6.19, when not long ago it cost only $1.99 to $2.49. He argued that even if the increase is small, such price hikes still weigh heavily when prices are already elevated. "Pushing that false price ceiling higher and higher is painful," he said. Betting the Market Is About to Peak Burry's latest comments came after he had just disclosed his short positions. He said nearly all of his short positions were established through buying put options on the Nasdaq 100 and the VanEck Semiconductor ETF (SMH). Both positions had 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 put options on Oracle Corporation (ORCL.US), Palantir (PLTR.US), MetLife, Inc. (MET.US), and Carter's Incorporated, and Caterpillar (CAT.US). "I think there are 0 to 9 months before a major market top," Burry said. He described the semiconductor fund as a concentrated bet aimed at shorting stocks he believes are overstretched in valuation, with NVIDIA Corporation accounting for nearly one-fifth of the fund's total holdings. His bearish call is based in part on a phenomenon: even as major stock indexes sit at record highs, market breadth is weakening. 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 during the peak phase of the tech bubble. "Market tops tend to form during this denial phase. This phase lasts 6 to 9 months, possibly more than a year," he said. However, Burry also acknowledged that stocks could still rally substantially before eventually turning lower. "The last few 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 the bull market to surge rapidly in a short period," he said in a recent weekend post.