Retail investors, who were largely absent during the record-breaking surge in chip stocks in April, are now piling in just as concerns mount that the sector's momentum may be waning.
According to JPMorgan's positioning data, individual investors' buying of technology stocks surged to its highest level in a year last week, with memory chip companies benefiting from artificial intelligence development being the most favored. Hardware companies also recorded their second-largest inflow on record.
While no clear factors are stopping the sector from advancing further, the Philadelphia Semiconductor Index has soared 60% over the past six weeks, leaving nearly all valuation metrics looking stretched. For retail investors who only entered the market in May, this means they could face losses if market momentum suddenly shifts.
Dave Mazza, CEO of Roundhill Financial Inc., stated, "This earnings season validated the investment thesis in AI infrastructure, with semiconductor and memory chip companies performing strongly. Looking ahead, the market increasingly reflects a state of 'perfect pricing.'" He added, "The return of retail investors is not inherently a bearish signal, but it adds fuel to a rally that has been ongoing for a long time and is beginning to show parabolic characteristics."
The return of retail capital marks a shift from earlier this spring. At that time, due to concerns sparked by the Iran conflict, the S&P 500 approached a technical correction, and many retail investors remained on the sidelines during the market rebound. Now, as U.S.-Iran peace talks progress, this group is flooding back into semiconductor and hardware stocks such as SanDisk,
Chris Verrone, Head of Macro and Technical Strategy at Strategas Securities LLC, noted in a client report, "The semiconductor sector's move is becoming somewhat 'absurd,' in some cases as extreme or more extreme than 1999. Parabolic advances tend to be self-reinforcing; we cannot predict when the trend will reverse, but it is prudent to protect positions and monitor closely at current levels."
The astonishing rally in chip stocks finds almost no parallel in other market sectors. Within the S&P 500, the percentage of stocks trading above their 200-day moving average—a technical gauge of momentum—has declined from 58% to 53% over the past week. Strategas researchers view this as indicative of a narrowing 'melt-up.' In contrast, approximately 97% of the components in the Philadelphia Semiconductor Index are trading above their long-term moving averages.
Cameron Dawson, Chief Investment Officer at Newedge Wealth, commented, "The semiconductor sector is undoubtedly in overbought territory—relative to its long-term trend, this is the most extreme reading since early 2000."
Comments