Michael Burry, the investor who famously called the 2008 housing collapse and was portrayed by Christian Bale in the classic “The Big Short,” is once again sounding the alarm.
Burry is not wrong to point out a vulnerable stock market that has again pushed to record highs, declaring that it has “jumped the shark.”
He’s essentially doing what he did 20 years ago. And while his modern audience is ignoring him just as they did before, this time, the audience is bigger. That means, if his concerns come to pass, no one… I mean no one … has the right to say “wow, that was unexpected.”
You’ve probably heard the expression “jump the shark.” It goes back to an episode of “Happy Days” when Fonzie (Henry Winkler) waterskied over a live shark. At the time in 1977, critics lamented how the show lost its initial charm.
For Michael Burry, the implication is that the stock market has finally overstayed its welcome. And that anything that occurs from here on out is essentially the financial-cycle equivalent of being on borrowed time.
Given the amount of borrowed money that has helped drive the S&P 500 Index ($SPX) higher, that’s par for the course. And in this case, the course is a sea of liquidity with a shiver of sharks waiting to smell blood.
Burry is convinced that conditions are building for a significant and broad reversal. And I’m convinced he’s going to be right. The only issue is how long it will take for the sharks to get their way.
Here’s What the S&P 500 Is Up Against
This is just “so dot-com bubble.”
Burry noted that “absolutely non-stop AI” has become the only topic of conversation on Wall Street. In his view, this single-theme dominance has caused a total breakdown in rational price discovery. On the same day the S&P 500 hit its record high, University of Michigan consumer sentiment fell to a new record low of 48.2.
Burry argues that stocks are no longer moving based on jobs data or sentiment. Instead, they are “going straight up because they have been going straight up. Based on a two-letter thesis [AI] that everyone thinks they understand.” He specifically pointed to the Philadelphia Semiconductor Index ($SOX), whose related ETF (SOXX) has now gained more than 60% this year.
Beyond market sentiment, Burry is skeptical of the massive capital expenditures being poured into AI infrastructure. He recently compared the tech giants’ spending to department stores installing escalators. It is a necessary expense for competition that ultimately provides no durable advantage or clear path to utilization by the real economy. He cautioned that hyperscalers are wasting trillions on microchips and data centers that will quickly become obsolete.
While Burry is calling for an end to the rally, other prominent figures agree with the historical parallel but differ on the timing. Billionaire trader Paul Tudor Jones also noted that today’s environment feels like 1999 — about a year before the eventual tech peak. However, Jones suggested the rally could potentially continue for another year or two before a “breathtaking” correction occurs.
If this all comes to pass, and Burry is again prescient in his outlook, there’s a straightforward way for investors to profit from a steep S&P 500 decline. The ProShares Short S&P 500 ETF (SH) is one of many inverse ETFs that simply move opposite an index. In this case, the S&P 500. As you can see by this chart, that inverse effect works both ways. That’s why SH rallied more than 20% in a month last spring, but gave it all back and much more since that time as the market rebounded strongly.
The timing is the thing. But I always think of inverse ETFs as part of a broader mantra of “playing offense and defense at the same time,” pairing ETFs like these with “long” holdings in ETFs, stocks, or both. Either way, in the spirit of Fonzie and Michael Burry, to take a balanced approach at times like this is “cool.”
Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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