Retail investors rush into chip stocks frenzy, analysts warn the rally has become extreme

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Chip stocks have experienced an epic surge over the past six weeks, and retail investors who previously missed out on this rally are now flocking into the market—just as valuations are soaring across the board and technical indicators are flashing rare warning signals.

According to JPMorgan's latest position data, net purchases of tech stocks by individual investors last week rose to the highest level in nearly a year, with hardware companies benefiting from the AI boom—such as memory chip makers—seeing the second-largest capital inflow in history.

The Philadelphia Semiconductor Index (SOX) has risen a total of 60% over the past six weeks, while the tech-heavy Nasdaq 100 Index has risen 25% over the same period.

Such a fierce rally has left almost all indicators looking overvalued. Roundhill Financial CEO Dave Mazza said that retail investors re-entering the market "is not necessarily a bearish signal in itself, but it pours fuel on a rally that has already come a long way and is beginning to take on a parabolic shape."

Multiple market analysts have successively warned that the chip sector has shown extreme technical signals, and investors must closely monitor and protect existing positions.

Retail investors chase in after missing out, raising concerns about timing

When chip stocks hit record highs this April, most retail investors remained on the sidelines. At that time, concerns related to the Iran war briefly pushed the S&P 500 to the brink of a technical correction, leading many individual investors to hold off on action.

Now, as US-Iran peace talks continue and market sentiment brightens, retail investors are increasingly allocating to semiconductor and hardware companies, with Sandisk, Micron Technology, and Intel among the most favored. Hardware stocks recorded the second-largest capital inflow on record last week.

Dave Mazza pointed out that this earnings season has validated the investment logic of AI infrastructure, as the performance of semiconductor and memory chip companies has met market expectations. "But looking ahead, market pricing is increasingly approaching perfection." For retail investors only entering in May, the risk of a sudden momentum reversal could translate directly into real losses.

Technical indicators flashing red, highly similar to the eve of the 2000 dot-com bubble

Technical analysts are now using rather severe language. Chris Verrone, head of technical and macro strategy at Strategas Securities, wrote in a client note:

"The semiconductor sector has become absurd, in some cases matching or even exceeding the extremes of 1999. Parabolic movements have a logic of their own—we can't predict the exact timing of a reversal, but positions should be closely protected and monitored at this point."

Judging by the SOX index's deviation from the 200-day moving average, the current situation is particularly concerning.

According to John Kolovos, Chief Technical Strategist at Macro Risk Advisors, the index is currently 57% above its 200-day moving average. Since 1990, there have only been two other instances when it reached such heights—1995 and 2000, the latter just before the internet bubble burst.

Cameron Dawson, Chief Investment Officer at Newedge Wealth, also said:

"Semiconductors are indisputably overbought—this is the largest deviation from the long-term trend since early 2000."

On the broader S&P 500 level, the proportion of stocks trading above their 200-day moving average fell from 58% the previous week to 53%, whereas for the SOX index, that figure is as high as 97%. Based on this, Strategas researchers judge that the market is undergoing a "narrow melt-up."

Bull-bear debate: AI super-cycle or on the verge of a correction

The core market dispute is whether this rally truly reflects a structural re-rating driven by AI demand, or is just another cycle of overbuying in a historically cyclical sector.

Cameron Dawson acknowledges that this super-cycle, which began in 2023, "is the largest in scale and duration in industry history and the market has been greatly underestimating it," but she remains convinced that the chip sector is still cyclical:

"Demand will eventually slow down; it's not a question of 'if,' but 'when.'"

John Kolovos also pointed out the dilemma facing both the bulls and bears under overbought signals:

"Bullish momentum can persist longer than expected, and exiting too early just because the sector appears overbought might mean missing a significant further upside; but those who chase momentum too aggressively risk being caught on the wrong side if the trend finally reverses."

Alexander Altmann, head of global equity tactical strategy at Barclays, believes that betting on this rally ending may be premature. He noted that he's recently received multiple client inquiries about whether they should sell chip stocks, but in his view, the extreme euphoria signals aren’t yet widespread enough to suggest this trade has fully played out.

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