Jessica Menton
Michael Burry, the investor made famous in The Big Short, is warning that the Nasdaq 100 Index is headed toward a dramatic reversal after a “parabolic” surge that has driven technology valuations to unsustainable heights and Wall Street to record levels.
In a post on Substack, Burry said the market resembles the peak of the dot-com bubble just before it burst, citing in particular the steep jump in chip stocks that has pushed up the Philadelphia Stock Exchange Semiconductor Index by nearly 70 per cent since the end of March.
He said the Nasdaq 100, by his reckoning, is trading at 43 times earnings — well above the implied level of around 30 times — because “Wall Street may be overstating by more than 50 per cent the earnings at our fastest growing, most highly valued companies.”
“We are witnessing history. In the stock market, that is not a good thing,” Burry said. He likened it to the “scene of the bloody car crash, minutes before it happens.”
Burry is among a number of market observers who have expressed concerns about the rally unleashed by the artificial-intelligence spending boom from Alphabet, Amazon.com and the other big tech companies. That’s pushed indexes to record highs even as the US war against Iran threatens to both slow growth and fan inflation by elevating oil prices.
Sundial Capital Research analysts led by Jason Goepfert noted that this will be only the fourth time the S&P 500 has hit a record high while only 5 per cent of its members were at 52-week lows, underscoring the scope of the rally. Data compiled by Bespoke Investment Group show that the Philadelphia semiconductor index has pushed this far above its 200-day moving average only two other times, in July 1995 and in March 2000, at the peak of Internet bubble.
Burry advised against shorting stocks, given the expense of put options and the risk of being burned by ill-timed trades.
He said he is holding a “significant leveraged short position against a portfolio of companies” that he finds “depressed and cheap,” without elaborating, and plans to “lighten up on companies” that don’t meet his “strictest valuation requirements.” He advised taking profits from the recent rally and reducing exposure to stocks in general, particularly those from the tech sector.
“Even if it seems there is more time to run up, anyone lucky enough to be riding these parabolic moves, by not selling, is betting on one’s own ability to jump off at or near the top,” he wrote.
“History tells us that even if the party goes on for another week, month, three months or year, the resolution will be to much lower prices,” he said.
“We are getting into that rare air, so extreme that the consequences will be unavoidable, no matter where one hides.”
Bloomberg
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