Retail investors flood into chip stocks for a frenzy, analysts warn the rally has become increasingly extreme

Chip stocks have staged an epic rally over the past six weeks, and retail investors who missed this round of gains are rushing in—just as market valuations are rising broadly and technical indicators are issuing rare warning signals.

According to Morgan Stanley’s latest holdings data, last week retail investors’ net buying in technology stocks rose to the highest level in nearly a year. Hardware companies that benefit from the AI wave—such as storage-chip firms—recorded the second-largest capital inflow on record.

The Philadelphia Semiconductor Index (SOX) has climbed 60% in total over the past six weeks, while the Nasdaq 100 index—dominated by tech stocks—rose 25% over the same period.

Such a fierce uptrend makes nearly all indicators look overvalued. Dave Mazza, CEO of Roundhill Financial, said that retail investors re-entering the market “is not itself a bearish signal, but it adds fuel to a rally that has already gone a long way and is starting to take on a parabolic shape.”

Multiple market analysts have warned in succession that the chip sector’s technicals have shown extreme signals, and investors need to monitor closely and protect their existing positions.

Retail investors chase in after missing out—entry timing raises concerns

In April this year, when chip stocks hit record highs, most retail investors were mostly sitting on the sidelines. At the time, concerns tied to the Iran war pushed the S&P 500 index to the brink of a technical correction for a period, and many individual investors chose to stay put.

Now, as US–Iran peace negotiations continue to move forward, market sentiment has clearly warmed up, and retail investors have begun to move aggressively into semiconductor and hardware companies. Sandisk, Micron Technology, and Intel are all being actively favored. Hardware stocks recorded the second-largest capital inflow on record last week.

Dave Mazza noted that this earnings season has confirmed the investment logic behind AI infrastructure, and the performance of both semiconductors and memory chips has not disappointed the market. “But looking ahead, market pricing is increasingly aligning with perfect expectations.” For retail investors who only entered in May, the risk of a sudden reversal in momentum could translate directly into real losses.

Technical indicators flash red, highly similar to the run-up before the 2000 tech bubble

Technical analysts’ wording is already quite severe. Chris Verrone, head of technical and macro strategy at Strategas Securities, wrote in a client report:

“The semiconductor sector has become ridiculous; in some cases, it is as extreme as—if not more extreme than—1999. Parabolic price moves follow their own rules. We can’t know the exact timing of the fate reversal, but positions should be prudently protected and monitored right now.”

Based on the extent to which the SOX index has deviated from its 200-day moving average, the current situation is particularly worth watching closely.

According to John Kolovos, chief technical strategist at Macro Risk Advisors, the index is currently 57% above its 200-day moving average. Since 1990, it has only reached such a level twice—once in 1995 and again in 2000, with the latter occurring just before the burst of the internet bubble.

Cameron Dawson, chief investment officer at Newedge Wealth, also said:

“The semiconductor sector is undeniably overbought—this is the biggest deviation from the longer-term trend since early 2000.”

On the broader S&P 500 index, the proportion of constituent stocks trading above the 200-day moving average fell from 58% the week before to 53%, while in the SOX index, that proportion is as high as 97%. Strategas analysts interpret this as a structural narrowing “melt-up” in the market.

Bull vs. bear debate: AI supercycle or just before a pullback

The core disagreement in the market is whether this rally reflects a structural revaluation driven by AI demand, or instead another blow-off top in a historically highly cyclical industry.

Cameron Dawson acknowledges that the supercycle launched in 2023 “is the largest in industry history in both scale and duration, and the market has been massively underestimating it,” but she still views the chip sector as a cyclical industry:

“Demand will eventually slow down. This isn’t a question of ‘whether,’ but of ‘when.’”

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

“The momentum for longs could persist beyond expectations, and if investors exit early simply because the sector looks overbought, they may miss substantial upside. But investors who chase market momentum too aggressively face the risk of losing control if the trend ultimately reverses.”

Alexander Altmann, head of global equity tactical strategy at Barclays, believes that betting that this rally is ending may be premature. He said he has recently continued to field client questions about whether to sell chip stocks, but in his view, the signals of extreme euphoria have not yet become widespread enough to indicate that the trade has fully played out.

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