Individual investors largely missed the record-breaking surge in semiconductor stocks during April. However, they are now piling in just as concerns grow that the sector's momentum may be waning. According to JPMorgan's positioning data, individual investors' purchases of technology stocks last week reached their highest level in a year, with memory chip makers benefiting from the AI boom being particularly favored. Hardware stocks saw the second-largest inflows on record.
While nothing is stopping the sector from rising further, the Philadelphia Stock Exchange Semiconductor Index (SOX) has soared 60% over the past six weeks, stretching nearly all valuation metrics to their limits. For retail investors who waited until May to jump into the sector, the market could turn abruptly at any time, leading to potential losses.
Dave Mazza, CEO of Roundhill Financial Inc., stated, "This earnings season validated the investment thesis for AI infrastructure, with semiconductors and memory chips performing as expected. Looking ahead, the market increasingly appears to be pricing in 'perfection.' The return of retail investors is not a bearish signal in itself, but it adds fuel to a rally that has already seen massive gains and is beginning to show parabolic characteristics."
The return of retail buyers marks a shift from earlier this spring when many remained on the sidelines during a market rebound that followed concerns over the Iran conflict pushing the S&P 500 to the brink of a technical correction. Now, with peace talks between the U.S. and Iran ongoing, retail investors are flocking back to semiconductor and hardware stocks such as Sandisk (SNDK.US), Micron Technology (MU.US), and Intel (INTC.US). The sector's fervor has driven the tech-heavy Nasdaq 100 Index up 25% over six weeks.
Chris Verrone, Head of Technical and Macro Strategy at Strategas Securities LLC, noted in a client report, "The semiconductor sector has become irrational, with extremes in some cases reaching or exceeding 1999 levels. Parabolic charts can sometimes sustain themselves, and we are not predicting the exact day or hour of a reversal, but investors should protect their positions here and remain highly vigilant."
The staggering gains in chip stocks find no parallel in other market sectors. Within the broader S&P 500 Index, the percentage of stocks trading above their 200-day moving average—a technical momentum indicator—has declined from 58% to 53% over the past week. To Strategas researchers, this suggests a "melt-up" is unfolding in real time. In contrast, approximately 97% of the components in the SOX index are trading above their long-term moving averages.
Cameron Dawson, Chief Investment Officer at Newedge Wealth, commented, "The semiconductor sector is undoubtedly overbought—this represents its largest deviation from the long-term trend since early 2000." She added that the core debate among investors is whether this rally reflects a lasting structural shift or merely another upswing in a historically cyclical industry.
Although the AI boom has led some to argue that chip makers deserve higher long-term valuations due to sustained demand, Dawson still views the sector as cyclical—though she describes the current phase as the largest and longest "super-cycle" the industry has ever experienced. "Notably, this super-cycle, which began in 2023, has been severely underestimated. It has performed exceptionally well during its duration, but a slowdown in demand will eventually come," she said. "It's only a matter of time, not if."
The extreme nature of the current momentum is evident in the SOX index's deviation from its 200-day moving average. John Kolovos, Chief Technical Strategist at Macro Risk Advisors, pointed out that the index is currently 57% above its 200-day line—a level only seen twice since 1990, in 1995 and 2000. Both instances were followed by market declines, with the 2000 occurrence preceding the dot-com bubble burst.
Kolovos explained that this leaves investors in a dilemma: momentum driven by risk appetite could persist longer than expected, and selling a sector simply because it appears overbought might mean missing significant upside. At the same time, "investors who cling too tightly to momentum leaders risk losing control once the trend eventually reverses."
Alexander Altmann, Global Head of Equity Tactical Strategy at Barclays, is among the professionals warning that it may still be premature to bet against chip stocks. Altmann and his colleagues have been fielding client questions about whether now is the time to sell semiconductor holdings. In his view, signs of excessive market euphoria are not yet widespread enough to indicate the rally has run its course. He stated that shorting the VanEck Semiconductor ETF (SMH.US) at this juncture "would be nothing short of a career-ending move for me."
Comments