Michael Burry recently tweeted a warning that the stock market has been acting irrationally again as strange stock market events have been happening the past few weeks. Michael Burry’s tweet noted that prior market crashes have ended after the speculation and silliness that fueled the previous bubbles has left the stock market. However, he compares this current market crash to 2001 during the dot com bubble when the stock market was still behaving irrationally. During this time, it was additional events like Enron’s fraud and bankruptcy that further pushed the markets into turmoil and began to mark the end of the speculative activity and irrationality of the early 2000’s dot com bubble.
In a follow up tweet, Michael Burry pointed to a recent case with Magic Empire Global stock which had soared up 6,149% after its IPO as speculative trading drove the stock up in a parabolic fashion. Michael Burry attributed the volatile movement to desperation from stock traders saying that “gamblers gamble more the more they lose”. Magic Empire is a Hong Kong based financial services company with less than $17 million dollars in revenue and the company had over a $5 billion dollar market cap at one point as speculative traders bought the stock and drove the price up. Magic Empire stock then crashed 89% the following couple days as traders all started to sell the stock after its price stopped climbing. Michael Burry sees this as a clear example of the kind of silliness that’s been present in the stock market since 2020 as relaxed monetary policy and low interest rates fueled a massive increase in stock market prices and market activity.
This isn’t even the most egregious example of the irrational market behavior Michael Burry is pointing to – a financial technology company in Hong Kong called AMTD Digital soared over 30,000% in just three weeks since their IPO. This made the company briefly bigger than Goldman Sachs even though AMTD Digital had less than $25 million dollars in revenue in a year and Golman Sachs had nearly $60 billion dollars in revenue last year. AMTD stock price has since declined over 85% following the speculation fueled volatility.
Michael Burry is pointing to the fact that these events show that there is still lots of speculative excess that exists in the stock market. Meme stocks have been making a comeback as well in recent weeks as Bed Bath and Beyond has risen over 200% the last month and AMC stock has risen over 45% during the same time period despite the fact that both businesses are struggling and have weak fundamentals.
The fact that speculation like this is still taking place in the markets suggests that stock market pessimism isn’t as strong as people think. There are still plenty of speculators and bulls who are pushing prices higher despite the weakening fundamentals in the economy and stricter monetary policy. Since there are still many bulls and speculators holding on to stocks that haven’t sold yet, Michael Burry and the general theory surrounding market psychology would say that there is still plenty of optimism in the market which means that there is more room for the stock market to fall.
In the theory of stock market psychology and market cycles, stock market cycles start with disbelief as people don’t believe a rally will last. As the stock market continues to climb the wall of worry and stock prices increase, people start to become more optimistic until the market reaches a euphoria point where bullish sentiment is at its peak and there are tons of buyers in the market that are pushing stock prices to new heights. Then the market starts to become complacent as stocks begin to decline with some people selling and taking profits. As the excessive bullish sentiment begins to leave, the market becomes more anxious before leading to panic and a capitulation point where bearish sentiment and negativity begins to peak. Eventually the market cycle begins to reset as a new stock market cycle begins with disbelief in a stock price rally.
This is why Michael Burry is warning that the recent stock market speculation and irrationality could be a bad sign for the stock market and means the market could potentially fall further. Market sentiment seems like it has not deteriorated to the point of a bottom in the stock market since speculators are still fueling stock price moves to extreme valuations that make no sense like what just happened with Magic Empire Global and AMTD Digital stocks. For these reasons, Michael Burry is warning that the stock market is not healthy yet and has not yet normalized.
Disclaimer: Opinions expressed in this video are my personal opinion and are for information and entertainment purposes only. It is not intended to be investment advice and you are responsible for doing research and making your own investment decisions. Seek a licensed professional for investment advice.
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