"Big Short" Investor Michael Burry Bets Against the AI Rally: "We Are Near a Major Top, and Possible a 1987-Type Fall"

 

"Big Short" Investor Michael Burry Bets Against the AI Rally: "We Are Near a Major Top, and Possible a 1987-Type Fall"

**Despite the S&P 500 surging to record highs on Tuesday, the investor who predicted the 2008 housing crash is doubling down on his bearish bets. He warns the AI-driven market boom is creating a "self-reinforcing" cycle that could end in a historic collapse.**

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## The Big Short's Big Warning

Michael Burry, the investor immortalized in the film "The Big Short" for profiting from the 2008 subprime mortgage crisis, is not joining the celebration as Wall Street scales new heights. In a Substack post on Tuesday, Burry maintained that the market could be near a "major top," warning of a potential crash reminiscent of the 1987 stock market meltdown.

"I continue to believe it is possible we are near a major top, and possible a 1987-type fall," Burry wrote, even as the S&P 500 jumped 1.9% to its first record close since June.

The market's advance, driven by a relentless AI-fueled rally and optimism over a potential reopening of the Strait of Hormuz, does not appear to have changed his long-term view.

## Echoes of Black Monday

Burry's warning invokes the infamous "Black Monday" of October 19, 1987, when the Dow Jones Industrial Average plunged 22.6% in a single day—a one-day loss unmatched in the index's history.

He is concerned that the market's current structure is creating a self-reinforcing but fragile rally. The investor highlighted that the S&P 500 has surged 5% over four trading days to a new high only three other times in the last 30 years: in 1999 (near the dot-com boom), 2000 (at the top of the TMT bubble), and 2020.

Burry is particularly focused on the semiconductor sector (the SOX) and momentum trades, which he views as the key indicators for a potential downturn. He noted that these areas were "hit hard in July," and the crucial question is whether they can regain market leadership or if their weakness signals a broader trend reversal.

## The Volatility Trap

The investor's thesis hinges on a specific mechanical feedback loop in today's market. He argues that the current rally is being fueled by "falling volatility," which is forcing volatility-targeting funds to increase their leverage.

"Remember, the market going up on falling volatility forces vol-targeting funds to leverage up, and brings leverage from other momentum strategies into play," Burry wrote. This dynamic creates a situation where funds are buying more as the market rises, setting the stage for a violent reversal if sentiment shifts.

## Betting Against the AI Boom

Burry remains one of Wall Street's most vocal critics of the artificial intelligence boom, arguing that demand for AI infrastructure is being driven by financing mechanisms that may not be sustainable.

He continues to hold short positions against several key technology and industrial stocks, maintaining a bearish stance on the very names that have led the market higher. According to his Substack post, his targets include:

- **Nvidia (NVDA)**

- **Micron (MU)**

- **Tesla (TSLA)**

- **Palantir (PLTR)**

- **Applied Materials (AMAT)**

- **Caterpillar (CAT)**

- **iShares Semiconductor ETF (SOXX)**

Burry noted that all of these bearish positions remain profitable, except for his short bet against Nvidia.

Despite his conviction, Burry acknowledged the inherent risk of short selling, a strategy he says is not suitable for most investors. He added that he would "cut his losses" if the trades moved decisively against him.

## A Self-Aware Prophet

Burry has previously acknowledged his reputation as a perennial bear, at one point calling himself "a meme for the number of times I have called a crash." However, he has also defended his track record, stating, "Still, I got it right in 2000, got it right in 2007. Got it right in 2019, helped by COVID, and I called the meme stock crash in mid-2021."

Despite his warnings, not everyone is convinced. In an X post, Kip Herriage of Vertical Research Advisory pushed back on Burry's crash call, stating, "Barring an alien attack, in a bull market of this breadth & strength, Burry is going to see his short positions get absolutely smoked into 2027."

## Frequently Asked Questions

**Q: What is Michael Burry warning about?**

A: Michael Burry warns that the market could be nearing a major top and faces a possible crash similar to the 1987 "Black Monday" sell-off. He believes the AI-driven rally is creating a fragile, self-reinforcing cycle that could quickly reverse.

**Q: Why does he think a crash is coming?**

A: Burry argues that declining market volatility is forcing systematic and volatility-targeting funds to increase their leverage, creating artificial demand. He also believes the demand for AI infrastructure is fueled by unsustainable financing, similar to previous speculative bubbles.

**Q: What stocks is he shorting?**

A: Burry is shorting several high-flying tech and industrial stocks, including Nvidia, Micron, Tesla, Palantir, Applied Materials, Caterpillar, and the iShares Semiconductor ETF (SOXX).

**Q: Has Burry been right about market crashes before?**

A: Yes. Burry is famous for correctly predicting the 2008 housing market crash and has also called other market turning points. However, he has also admitted he has been early on some of his bearish calls.

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## Disclaimer

**IMPORTANT:** This article is for informational and educational purposes only and does not constitute financial, investment, or trading advice. The information contained herein is based on publicly available sources and reflects the author's understanding as of the publication date. Market conditions, stock prices, and economic data are subject to rapid change. Past performance is not indicative of future results. You should consult with a qualified financial advisor before making any investment decisions. Short selling is a high-risk strategy and is not suitable for most investors.