The Zhitong Finance App learned that Michael Berry, an investor famous for accurately predicting the 2008 subprime mortgage crisis, warned that painful transactions in the market may continue. The prototype character in the movie “The Big Short” proposed a bearish “Scarlet October” scenario: if the “Big Seven US stocks” follow the decline in semiconductor stocks and bond yields fall at the same time, then his judgment on this scenario will be firmer. “When it comes to painful transactions, my opinion is that painful deals evolve into fatal deals because they tend to last a long time,” he said in the Substack chat.
Bond yields are falling, but technology stocks are struggling to get a boost
After the US CPI for September was announced on Wednesday, US bond yields instantly soared. The 10-year US Treasury yield rose above 5.30%, but then fell rapidly and closed below 5.20%. The reason was that US bonds played a safe-haven role, and US bond yields declined as a result. However, the fall in US bond yields failed to benefit technology stocks — the Nasdaq Composite Index closed down 1.88% on Wednesday, while the Nasdaq 100 closed down 2.02%.
Burry pointed out that this phenomenon is worth being wary of. He said, “Although the general opinion in the market is that falling yields are good for stocks, the current painful trading is still falling interest rates and the NASDAQ index falling.”
What needs to be observed next is whether the weakness of semiconductor stocks will spread to the “Big Seven US stocks.” Burry said, “We have seen semiconductor stocks fall at the same time as interest rates, but if we finally see that the 'Big Seven US Stocks' also follow the fall in interest rates, then this will further strengthen our judgment on 'Scarlet October. '”
The “Big 7 US Stock Companies” include Apple (AAPL.US), Microsoft (MSGT.US), Google (GOOGL.US), Amazon (AMZN.US), Nvidia (NVDA.US), Meta Platforms (META.US), and Tesla (TSLA.US). Burry stressed that the combination is currently in the “last standing” position in the market, and pointed out that the recent performance of semiconductor stocks is similar to the market conditions before and after the 2000 tech bubble. He also mentioned that the S&P 500 index may show a trend of breaking through and failing.
Selling pressure tests Wall Street's long-standing calm
Barry pointed out that after the volume fell to a 20-year low, market trading activity has heated up. The volume of the SPDR S&P 500 ETF (SPY) is about 15% higher than the average, while the volume of the Invesco NASDAQ 100 ETF (QQQ) is about 25% higher. The S&P 500 index fell close to 1% at the time, while the share of falling stocks on the New York Stock Exchange reached 79%.
He also pointed out that since 2020, the S&P 500 index has recorded the longest period without a 1% drop in a single day. The New York Stock Exchange had no falling stock trading volume accounting for at least 80% of the day's total trading volume in the past year. This is also the longest period of such calm since records began; related records date back to 1996.
Furthermore, Burry cautioned that slowing inflation does not mean that the high price levels that households are already facing will fall with it. As an example, he said that the price of a bag of potato chips rose from $5.99 to $6.19, while not long ago the price was only $1.99 to $2.49. He believes that even if the increase is not significant, in a situation where prices are already high, such price increases will still put heavy pressure on them. He pointed out, “It would be painful to keep pushing that false price cap upward.”
Bet the market is about to peak
Before Bury made his latest comment, he had just revealed his short position. He said that almost all of the short positions were established by buying put options on the Nasdaq 100 Index and Vaneck Semiconductor ETF (SMH). The exercise price of both positions was 20% lower than the price of the underlying asset at the time, and the maturity dates were April 2027 and June 2027, respectively. He also retained individual put options on Oracle (ORCL.US), Palantir (PLTR.US), MetLife (MET.US), and Caterpillar (CAT.US).
“I think it's still 0 to 9 months until a major market peak appears,” Burry said. He described this semiconductor fund as a concentrated bet aimed at shorting stocks that he believes have been overvalued. Among them, Nvidia's holdings account for close to one-fifth of the fund's total holdings.
His bearish judgment is based in part on a phenomenon: although major stock indexes are at historically high levels, the breadth of gains within the market is weakening. Earlier this month, Burry calculated that 55% of the S&P 500 constituent stocks fell at least 20% from their respective highs, while over 80% of the constituent stocks fell by at least 10%. He compared this differentiation to market conditions at the peak of the tech bubble. He said, “The top of the market is often formed during this phase of denial. This phase will last 6 to 9 months, and possibly more than a year.”
However, Bury also acknowledged that the stock market may still rise sharply before it finally turns downward. In a recent weekend post, he said, “The last few months of the bull market are likely to be crazy. After all, the major indices have broken through and reached new highs, and it is entirely possible that the bull market will soar rapidly in a short period of time.”