"Bullish" Burry Issues Another Warning for US Stocks: If the "Magnificent Seven" Join the Drop and Bond Yields Fall, Wall Street May Face a "Bloody October"

According to Zhitong Finance APP, Michael Burry, the investor renowned for his accurate prediction of the 2008 subprime mortgage crisis, warned that the market's painful trades may persist. The real-life inspiration for the movie "The Big Short" put forward a bearish "Bloody October" scenario: his conviction in this view would strengthen if the "Magnificent Seven" in the US stock market follow semiconductor stocks in declining, while bond yields simultaneously fall. He stated in a Substack chat, "When it comes to painful trades, my view is that painful trades can turn into fatal trades because they often last for a long time."

Bond Yields Drop, But Tech Stocks Struggle to Benefit

After the US September CPI was released on Wednesday, US Treasury yields spiked briefly. The 10-year Treasury yield once rose above 5.30%, but quickly fell back to close below 5.20%, as Treasuries played a safe-haven role, driving yields down. However, the drop in Treasury yields failed to benefit tech stocks—the Nasdaq Composite Index closed down 1.88% on Wednesday, and the Nasdaq 100 Index fell 2.02%.

Burry pointed out that this phenomenon deserves caution. He said, "Although the consensus is that falling yields are good for stocks, the painful trade at present still remains lower rates and a declining Nasdaq."

The next thing to watch is whether the weakness in semiconductor stocks will spread to the 'Magnificent Seven.' Burry said: "We have already seen semiconductor stocks fall in tandem with rates; if we eventually see the 'Magnificent Seven' also follow rates lower, it will further reinforce our view of a 'Bloody October.'"

The "Magnificent Seven" includes Apple (AAPL.US), Microsoft (MSFT.US), Google (GOOGL.US), Amazon (AMZN.US), Nvidia (NVDA.US), Meta Platforms (META.US), and Tesla (TSLA.US). Burry emphasized this group is now the market's "last standing force," and noted that recent semiconductor performance is reminiscent of market conditions before and after the 2000 tech bubble. He also mentioned that the S&P 500 Index could show a failed breakout pattern.

Selling Pressure Tests Wall Street’s Prolonged Period of Calm

Burry noted that after trading volumes dropped to 20-year lows, market activity has picked up. The trading volume of the SPDR S&P 500 ETF (SPY) is about 15% above average levels, while Invesco QQQ ETF (QQQ) is about 25% higher. At the time, the S&P 500 was down nearly 1%, and declining stocks on the New York Stock Exchange accounted for 79% of the volume.

He also pointed out that since 2020, the S&P 500 has recorded its longest period without a single-day drop of 1%. The New York Stock Exchange has not seen a day in almost a year when declining stock volume made up at least 80% of total daily volume—this is the longest such calm period on record, with statistics going back to 1996.

Additionally, Burry reminded that slowing inflation does not mean that households are seeing relief from high price levels they already face. For example, he noted that the price of a bag of chips has risen from $5.99 to $6.19, when not long ago it was only $1.99 to $2.49. He believes that even minor increases, when prices are already high, still exert considerable pressure. He stated, "Pushing that false price ceiling higher is painful."

Betting on a Market Top

Before making his latest comments, Burry recently disclosed his short positions. He said almost all of his shorts have been established by buying put options on the Nasdaq 100 Index and the VanEck Semiconductor ETF (SMH). Both of these positions have strike prices about 20% below the underlying assets' then-current prices, expiring in April 2027 and June 2027, respectively. He also retained individual stock put options on Oracle (ORCL.US), Palantir (PLTR.US), MetLife (MET.US), and Caterpillar (CAT.US).

Burry stated: "I believe we are 0 to 9 months away from a significant market top." He described the semiconductor fund as a concentrated bet designed to short what he considers overstretched stocks, with Nvidia accounting for nearly one-fifth of the fund's total holdings.

His bearish outlook is partly based on a phenomenon where, despite major stock indexes sitting at record highs, market breadth is weakening. Earlier this month, Burry calculated that 55% of S&P 500 constituent stocks had fallen at least 20% from their respective highs, and over 80% had dropped by at least 10%. He compared this divergence to the market situation at the peak phase of the tech bubble. He said: "Market tops often form during this denial phase. This phase can last 6 to 9 months, or even over a year."

However, Burry also acknowledged that the stock market could make a substantial move upwards before ultimately turning lower. He recently stated in a weekend post, "The last few months of a bull market can be absolutely crazy. After all, major indexes have broken out and hit new highs, and a rapid surge in this bull market is entirely possible in the short term."