Michael Burry Warns Wall Street’s ‘Pain Trade’ Can Last As Mag 7 Weakness Could Deepen ‘Red October’ Call

Burry flagged parallels with the 2000 tech bubble and a possible failed breakout in the S&P 500.

• Michael Burry warned that “pain trades become widowmaker trades” because they can persist for a long time.
• He highlighted a “Red October” scenario that would gain conviction if the "Magnificent Seven" followed semiconductor stocks lower alongside bond yields.
• SPY and QQQ trading volumes were running about 15% and 25% above average, while declining stocks accounted for 79% of NYSE volume.

Falling bond yields are failing to lift tech stocks, and Michael Burry is warning that the pain could persist. “The Big Short” investor highlighted a bearish “Red October” scenario that would gain conviction if the Magnificent Seven followed semiconductor shares lower alongside yields.

“Me about pain trades- pain trades become widowmaker trades because they tend to last a very long time,” Burry said in a Substack chat.  

S&P 500 ETF Trust (SPY) fell 1.1% to $769.60 on Wednesday, while Invesco QQQ Trust (QQQ) dropped 2% to $728.95 and the SPDR Dow Jones Industrial Average ETF Trust (DIA) slipped 0.1% to $515.63.  

Falling Yields Offer Tech Little Relief

Burry highlighted a warning that tech stocks were failing to benefit from lower bond yields. “While the consensus view is lower yields = bullish stocks, the pain trade continues to be rates down, Nasdaq down.”

The next test was whether weakness in semiconductor stocks would spread to the Magnificent Seven. “We have already seen semis fall with rates, but should we finally see Mag7 fall with rates, that would add conviction to our call for a ‘Red October’.”

The Magnificent Seven comprises Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla. Burry highlighted the group’s position as the market’s “Last Man Standing” and flagged parallels between semiconductor stocks’ recent performance and the period around the 2000 tech bubble. He also pointed to a possible failed breakout in the S&P 500 index.    

Selling Pressure Tests Wall Street’s Quiet Streak

Burry noted a pickup in trading activity after two-decade lows in volume, with the SPY trading about 15% above average volume and QQQ about 25% above average. The S&P 500 was nearing a 1% decline, while falling stocks accounted for 79% of NYSE volume.

He also highlighted the S&P 500’s longest stretch without a 1% down day since 2020. The NYSE had gone nearly a year without declining stocks accounting for at least 80% of a session’s volume, its longest such streak in records dating to 1996.

Additionally, Burry cautioned that slower inflation would not reverse the higher price levels households were already facing. He pointed to a bag of chips rising from $5.99 to $6.19 after costing $1.99 to $2.49 not long before, arguing that even modest price increases remained painful at those elevated levels. “Pushing up that false ceiling hurts,” he said. 

Burry Positions For A Market Top

The fresh comments come after Burry’s recent disclosure that almost his entire short position was expressed through puts on the Nasdaq-100 index (NDX) and VanEck Semiconductor ETF (SMH). Both positions were 20% out of the money, expiring in April and June 2027, respectively. He retained individual puts on Oracle, Palantir, MetLife and Caterpillar.

“I believe we are within 0-9 months of a significant top,” Burry said. He called the semiconductor fund a concentrated bet against stocks he considered overextended, with Nvidia representing nearly one-fifth of its holdings.

His bearish outlook rests partly on weakening market breadth beneath record index levels. Earlier this month, Burry calculated that 55% of S&P 500 constituents were at least 20% below their highs, while more than 80% were down at least 10%. He compared the divergence with the tech bubble’s topping phase.

“The market top is made during this denial phase, which lasts 6-9 months, possibly longer than a year,” he said. Still, Burry acknowledged that stocks could rise sharply before turning. “This last few months of the bull could be wild. After all, the indices did break through to new highs, and the bull could conceivably run up very quickly,” he said in a weekend post recently.

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