Michael Burry Sees a 2000-Style Rotation Where Today's AI Winners Fall and Today's Broken Stocks Rise, Citing 40 Years of Market Breadth Data He Calls "Incredible and Unique." Should Investors Rotate Out of the "Magnificent Seven" Now?
Key Points
Michael Burry says this market resembles 2000 because of the lack of breadth.
He points out that only a few AI stocks are driving all of the market's gains.
Smart investors who are concentrated in AI stocks should diversify to other sectors.
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Investors love to look at past market crashes to see if there are similarities to today. Michael Burry, the fund manager who bet against the housing market in 2008, recently wrote in his newsletter that statistically, this market reminds him of 2000, meaning investors should dump their megacap "Magnificent Seven" stocks and load up on market laggards.
Does that mean you should sell the Magnificent Seven? Well, it is a bit more complicated than that. Here's what Burry said, the data that backs up his views, and what smart investors worried about a stock market crash should do.
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What did Burry say?
Burry writes in-depth statistical analyses in his stock market newsletter and has been hammering home his view that the stock market today is reminiscent of the 2000 dot-com bubble, with internet stocks replaced by artificial intelligence (AI) winners. In the fallout from the 2000 bubble, the winners of the past few years collapsed in price, triggering a massive bear market in stocks, while the "old economy" losers soared.
The key to Burry's analysis is market breadth. This indicator shows how many stocks are driving up the index, and how many are lagging. Typically, a bull market will be driven by many stocks and a thriving U.S. economy. In this bull market, 55% of stocks sit 20% below their 10-year highs. The only other bull market with this many stocks in a drawdown while the market is at all-time highs is the dot-com bubble, at 71%.
Image source: Getty Images.
What smart investors will do
While Burry makes some strong claims about the characteristics of this bull market compared to 2000, that doesn't mean you need to rush out, sell all your stocks, and sit in cash.
However, if your portfolio is heavily concentrated in AI stocks like the Magnificent Seven, Space Exploration Technologies, CoreWeave, or other semiconductor-related stocks that have soared 100% in the past year, now might be a good time to consider diversification. A smart investor will trim their AI-related holdings and plow the proceeds into some beaten-down blue chip stocks, or could even consider adding long-term bonds yielding above 5% in their portfolios.
This will help you if a market crash resembling 2000 materializes. In this bear market, stocks that were major winners in the dot-com bull market crashed by over 90% or went bankrupt, wiping out years of gains for investors. Learn from history, and don't let the same tragedy happen to your portfolio if an AI-related bear market materializes.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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