Michael Burry's 'Red October' Warning: Why QQQ and SMH Could Face More Pain

Falling bond yields are failing to revive technology stocks, raising fresh concerns for investors tracking the Invesco QQQ Trust (NASDAQ:QQQ) and VanEck Semiconductor ETF (NASDAQ:SMH). Investor Michael Burry, in a recent thread on Substack, warned that the market’s apparent resilience could give way to a deeper correction.

Burry has described a potential "Red October" scenario in which semiconductor weakness spreads to the Magnificent Seven stocks, comprising Apple, Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT), Alphabet, Inc (NASDAQ:GOOGL), Amazon.com, Inc (NASDAQ:AMZN), Nvidia Corp (NASDAQ:NVDA), Meta Platforms, Inc (NASDAQ:META) and Tesla, Inc (NASDAQ:TSLA).

"The consensus view is lower yields = bullish stocks," Burry said, adding that the prevailing pattern of falling rates and a declining Nasdaq could become a prolonged "pain trade."

The warning comes as major equity ETFs face renewed selling pressure. On Wednesday, the SPDR S&P 500 ETF Trust (NYSE:SPY) fell 1.1% to $769.60, while QQQ dropped 2% to $728.95. The SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA) slipped 0.1% to $515.63.

SMH’s Concentrated Exposure Raises the Stakes

Burry’s bearish positioning puts SMH under particular scrutiny. According to a recent report, Nvidia accounted for almost 20% of the semiconductor ETF’s portfolio, followed by Taiwan Semiconductor Manufacturing (NYSE:TSM) at 9.3% and AMD at 5.6%. A sustained sell-off in these heavily weighted holdings could amplify pressure on the fund.

Burry disclosed that almost his entire short exposure was expressed through put options on the Nasdaq-100 and SMH. Both positions were roughly 20% out of the money, with the Nasdaq-100 options expiring in April 2027 and SMH options in June 2027. He said he believes a significant market top could emerge within zero to nine months.

Weak Market Breadth Adds to the Warning

The concern extends beyond technology stocks. Burry estimated that 55% of S&P 500 constituents had fallen at least 20% from their highs, while more than 80% were down at least 10%, despite the index reaching record levels.

Trading activity also showed signs of intensifying. SPY volume was about 15% above average, while QQQ volume was approximately 25% higher. Declining stocks accounted for 79% of NYSE trading volume, according to Burry’s observations.

For ETF investors, the critical signal will be whether weakness spreads from semiconductor stocks to the Magnificent Seven. A broader retreat could put additional pressure on QQQ, while SMH remains particularly exposed to volatility in AI-linked chipmakers.

However, Burry acknowledged that the bull market could still rally sharply before a potential reversal. His bearish positioning signals growing downside concerns, not confirmation that a market top is imminent.

Photo: generated using artificial intelligence via Midjourney.