To The Moon

The Party's Over? Why This Drop Feels Different

That familiar sinking feeling is back. For the third time in four months (August, September, and now November), the market has opened the month with a sharp drop. While October's dip was blamed on specific tariff news, this one feels more systemic.

With the S&P 500 up a staggering 37% in just six months—a feat seen only five times since 1950—and veteran bulls like Ed Yardeni warning of a 5% pullback, the crucial question is the one on everyone's mind:

Is this a healthy pause, or the beginning of a real trend reversal?

While the AI-driven narrative has powered this historic rally, a look under the hood reveals several flashing red lights. I believe this isn't just a minor pullback; it's a foundational warning that the market's key drivers are failing.

S&P 500

Let's break it down with a clear-eyed analysis, drawing on recent data and market dynamics. I'll avoid the hype and focus on the fundamentals, liquidity trends, and key player moves to assess whether this is a pause for breath or a potential reversal.

The Pullback in Context: Overbought Sentiment Meets Reality

Markets don't rise in straight lines, and the current dip feels familiar for a reason. Retail bullish sentiment has surged above long-term averages in five of the past seven weeks, creating a frothy environment ripe for correction. Veteran strategist Ed Yardeni, long a market bull, recently flashed a rare caution flag, warning that the S&P 500 could drop 5% before year-end due to "extreme bullish sentiment flashing red." He's sticking to a 7,000 year-end target for 2025—modest upside from current levels around 6,800—but highlights technical indicators and overcrowding as risks.

In my view, this pullback leans more toward a short-term pause than a full-blown reversal—for now. The S&P 500's 37% six-month gain is historically rare, but it has been fueled by genuine earnings growth in tech, particularly among AI-driven names. However, breadth is crumbling: Mega-caps are masking broader weakness, with speculative themes like quantum computing and nuclear energy tanking while the Magnificent Seven hold the line. Goldman Sachs notes that "everyone’s selling everything except the Mag 7," which suggests rotation rather than outright panic. If economic data remains solid—think steady job growth and controlled inflation—this could resolve as a healthy 3-5% dip to shake out weak hands.

That said, don't dismiss the risks. The rally's velocity has bred complacency, and with valuations stretched (S&P forward P/E around 22x), any whiff of disappointment could accelerate selling.

Michael Burry's AI Shorts: Echoes of "The Big Short" or a Premature Call?

Enter Michael Burry, the "Big Short" legend whose Scion Asset Management now holds put options on 5 million shares of Palantir Technologies (PLTR) valued at about $912 million and 1 million shares of NVIDIA (NVDA) at $186 million—comprising roughly 80% of his short positions. Burry's betting against two AI darlings amid the frenzy, and it's sparked debate: Is this the setup for "The Big Short 2.0," or just another contrarian swing?

Burry's track record post-2008 is spotty—he's nailed some calls but mistimed others, like his early China bets. Here, his scepticism aligns with concerns over AI hype. NVDA and PLTR have soared on promises of transformative tech, but execution risks loom: NVDA faces supply chain pressures and potential export curbs, while PLTR's government-heavy revenue stream could falter if budgets tighten. Palantir CEO Alex Karp fired back, calling Burry and other AI short-sellers "batshit crazy," which underscores the confidence in their pipeline but also highlights the emotional stakes.

Independently, I see merit in Burry's caution, but wouldn't crown it a sequel yet. AI isn't a housing-style bubble—it's backed by real capex and productivity gains. Goldman Sachs projects AI giants (Amazon, Google, Meta, Microsoft, Oracle) to ramp capital expenditures from $314 billion to $518 billion by 2026, a 65% jump in under a year. This spending spree could sustain growth, but if ROI disappoints (e.g., delayed monetisation), Burry's puts could pay off big. For now, it's a high-conviction hedge in a market where AI optimism has pulled back from 2026 projections, per Goldman.

Liquidity Squeeze: The Real Worry Under the Hood

The most concerning undercurrent? Liquidity is evaporating. On October 31, the US overnight secured funding rate (SOFR) spiked 18 basis points to 4.22%—the biggest one-day jump in a year—and the Fed's Standing Repo Facility hit record usage, flagging bank liquidity strains. Analysts liken the Treasury's $700 billion cash drain to "multiple rate hikes combined," shrinking system money just as AI dreams demand more fuel.

This isn't abstract: Tighter liquidity amplifies volatility, making pullbacks sharper. With the Fed's QT (quantitative tightening) nearing its end but funding markets stressed, even resilient sectors like tech could crack if borrowing costs stay elevated. Combine this with overheating sentiment, and the rally's longevity is questionable—perhaps 3-6 more months of upside before fundamentals catch up.

Wrapping Up: Pause or Reversal? And How Long Can the Rise Last?

To the discussion points: This pullback strikes me as a short pause, driven by sentiment reset rather than fundamental collapse. But if liquidity woes persist, it could morph into a trend reversal, especially if Q4 earnings miss. Burry's "short AI" bet has "Big Short 2.0" potential if AI capex yields underwhelm, but it's too early—his positions are bold but not infallible. With tightening liquidity and sentiment at extremes, US stocks might eke out modest gains into year-end, but the rally's days are numbered without fresh catalysts like rate cuts or AI breakthroughs.