Michael Burry Warns of a 1987-Type Crash - and the Mechanism Behind It Is the One Part the Market Isn't Checking

Michael Burry posted a Substack today - while the S&P 500 was closing at a new record - saying he still believes "we are near a major top, and possible a 1987-type fall."

He's not changing his view because the market keeps going up. He's explaining why the fact that it keeps going up is part of the problem. And that's the mechanism most commentary skips entirely.

The S&P 500 closed at a record high today, up 1.8%, its first record since June. The tech-heavy Nasdaq was even more extreme, with QQQ surging 3.4% to 724. Over the past five trading days, QQQ is up 7.2% while the equal-weight S&P 500 (RSP) has gained just 1.2%. That 6-percentage-point gap between what the mega-caps are doing and what the average S&P component is doing is the concentration problem Burry is sitting on the other side of. He holds short positions in the semiconductor ETF, Micron, Nvidia, Caterpillar, Palantir, Tesla, and Applied Materials. All are still profitable except the Nvidia short.

Yes, the bull case is straightforward. Earnings came in strong, oil prices dropped on hopes the Strait of Hormuz could reopen, and nothing is broken in the economy. Burry himself acknowledges the mechanics that keep pushing price higher: "the market going up on falling volatility forces vol-targeting funds to leverage up, and brings leverage from other momentum strategies into play."

That sentence is the entire thesis. It's not a narrative play. It's a plumbing description.

Here's what's happening under the hood. SPY implied volatility is sitting at 12.5% and the put/call volume ratio is 0.72 - buyers are loading up on calls, pushing dealers into the role of sellers on the other side of those contracts. When dealers sell that much call volume in a low-vol environment, their gamma exposure flips negative. Negative gamma means dealers are forced to buy as price rises and sell as price falls - they amplify moves instead of dampening them. That's the opposite of a stable regime. It's the regime where a selloff accelerates itself.

On the flow side, today's SPY data shows block orders - the institutional size - essentially flat, with $1.57 billion flowing in and $1.53 billion flowing out. Meanwhile, retail flows were the net buyers, edging roughly $72 million positive. The big money isn't leading this rally. It's small accounts and momentum algos chasing the move.

Put another way: the mechanism Burry describes creates a feedback loop. Low vol encourages cheap options buying → momentum and volatility-targeting strategies add leverage → price rises → vol falls further → repeat. The system is reinforcing itself. And when these systems work, they work well. That's what makes them dangerous. The break doesn't happen during calm conditions. It happens when something forces the system to unwind all at once.

Now let's look at why Burry specifically invoked 1987, not 2000, not 2008, not any other famous crash.

Black Monday on October 19, 1987, saw the Dow fall 22.6% in a single session and the S&P 500 drop roughly 20%. There was no economic crisis behind it. No recession, no geopolitical shock. What caused it was portfolio insurance - a program-trading strategy that automatically sold index futures as prices declined, which pushed prices lower, which triggered more automatic selling. It was a mechanical feedback loop, not a fundamental one.

The Federal Reserve's own analysis of the crash emphasized that trading systems simply couldn't process the volume, margin calls drained liquidity from the system, and uncertainty about information quality caused market participants to withdraw. The Fed had to step in providing highly visible liquidity support just to keep the plumbing functioning.

Today's analog isn't portfolio insurance specifically - those strategies were largely abandoned after 1987. But the modern equivalent is volatility-targeting funds, risk-parity strategies, momentum algos, and trend-following CTAs. They're all sitting on the same logical trigger: falling volatility equals add exposure. Rising volatility equals reduce exposure. When vol spikes - and it spikes fast in a negative gamma regime - they all pull back simultaneously. That's the 1987 mechanism wearing different clothing.

The circuit breakers installed after 1987 prevent a single-day 20% drop. They don't prevent the mechanical unwind. They just make it happen over three days instead of one. And three days of forced liquidation in a negative gamma environment can still be devastating.

Burry said in his post that new highs "will bring new money into the market." He's not wrong about that. He's also not wrong about what happens when that money stops.

Understanding what I understand about the options structure, the flow data, and the concentration metrics tells me the market is in a regime where the plumbing is working against it. SPY is trading $25 above its 50-day moving average, with RSI at 66 - not extreme on its own, but in a market where the five biggest tech names account for a disproportionate share of every daily move, that technical extension matters more because there are fewer independent price drivers underneath.

The put/call volume ratio on SPY is 0.72 - the most bullish it can be. But the put/call open interest ratio is 2.30, meaning there's a massive stockpile of puts already sitting in the system. Someone's hedging. That open interest build is the difference between what the crowd is buying today and what's going to get exercised tomorrow if things go sideways.

What happens next depends on what triggers the vol spike. Burry flagged three candidates in earlier posts: the Iran situation and oil volatility, a potential contagion event in private credit, or simply the AI infrastructure spending thesis running into demand reality. Any one of those could be the match. Or a combination.

The conditional chain is mechanical, not speculative:

If a negative catalyst hits and volatility rises, vol-targeting and momentum strategies reduce exposure. That selling pushes price lower. Dealers in a negative gamma regime sell into the decline to hedge. IV rises further, triggering more systematic selling. That's the feedback loop.

If nothing triggers it, the market continues higher. The feedback loop keeps reinforcing itself. Burry keeps losing on his shorts - the Nvidia bet is already underwater. He said he'll cut losses if the positions move decisively against him. That's the other side of being right about the mechanism: timing is not part of the model.

What to watch this week: a break below the 50-day moving average on SPY, currently at $746 - that changes the technical regime from extended to damaged. The VIX crossing back above 15, which is where volatility-targeting strategies start getting nervous. And advance-decline breadth - if SPY makes another high and RSP doesn't, the concentration problem just deepened one more day.

Burry closed with a line worth quoting: "Shorting is not for everyone. I must short. Most should not." The mechanism he's describing isn't a trading plan. It's a circuit diagram showing where the shorts are in the wiring.

Views expressed here are personal analysis and not investment advice.