Chip stocks continue to rise, and retail investors are chasing after them more and more! Wall Street: This is starting to look more and more like 1999.

In the just-past month of April, individual investors were basically absent from the record-breaking rally of chip stocks. However, now, just as worries are rising in the market about the possibility of the chip sector losing momentum, individual investors are rushing in. Position data from JPMorgan Chase shows that last week, individual investors' buying of tech stocks rose to its highest level in a year, with memory chip manufacturers benefiting from the AI boom being the most favored. Hardware stocks saw the second largest inflow of funds in history. Although there is nothing stopping the sector from continuing to rise, the Philadelphia Semiconductor Index (SOX) has surged 60% in the past six weeks, with almost all valuation indicators already showing signs of being stretched. For individual investors who waited until May to jump into this sector, the market could suddenly turn at any time, causing them losses. Dave Mazza, CEO of Roundhill Financial Inc., said, "This earnings season validates the investment logic of AI infrastructure, and the performance of semiconductors and memory chips is in line with expectations. Looking ahead, the market is increasingly pricing in perfection. The return of individual investors is not necessarily a bearish signal, but it is adding fuel to a rally that is already huge and beginning to look parabolic." The return of retail buyers marks a shift from earlier this spring when many were cautious during the market rebound period after worries about the Iran war pushing the S&P 500 index towards a technical correction. With peace talks between the US and Iran ongoing, retail investors are once again flooding into semiconductor and hardware stocks such as Sandisk (SNDK.US), Micron Technology, Inc. (MU.US) and Intel Corporation (INTC.US). The sector's frenzy has pushed the tech-heavy Nasdaq 100 index up 25% in six weeks. Chris Verrone, Director of Technical and Macro Strategies at Strategas Securities LLC, said in a client report, "The semiconductor sector has become irrational, and in some cases, the extreme has reached or exceeded that of 1999. Parabolic charts sometimes break out of independent trends, and we do not predict when or what hour the market will reverse, but investors should protect their positions and remain highly vigilant." The astounding rise of chip stocks cannot be matched in other sectors of the market. In the broader S&P 500 index, the proportion of stocks trading above their 200-day moving average (a technical momentum indicator) has dropped from 58% the previous week to 53%. This, according to research analysts at Strategas, suggests a melt-up is in progress. In contrast, around 97% of the constituents of the SOX index are trading above their long-term moving average. Cameron Dawson, Chief Investment Officer at Newedge Wealth, said, "The semiconductor sector is undoubtedly overbought it is the largest deviation from the long-term trend since the early 2000s." She added that the core debate for investors is whether this rally reflects a lasting structural shift or another cycle in this traditionally cyclical industry. While the AI boom has led some to believe that chip manufacturers should have higher long-term valuations because demand will remain sustained, Dawson still sees this sector as cyclical describing it as being in the largest and longest "super-cycle" the industry has ever experienced. Its worth noting that this super-cycle that began in 2023 has been severely underestimated. It has performed exceptionally well during its duration, but the slowdown in demand will eventually come," she said. "It's just a matter of time, not a matter of if. The extreme momentum of the current market can be seen through the deviation of the SOX index from its 200-day moving average. John Kolovos, Chief Technical Strategist at Macro Risk Advisors, pointed out that the index is currently 57% above the 200-day average, a level seen only twice since 1990 in 1995 and 2000. Following both instances, the stock market experienced a decline, with the 2000 event happening just before the bursting of the dot-com bubble. Kolovos explains that this puts investors in a dilemma: the momentum of risk appetite may last longer than expected, simply selling because a sector looks overbought may mean missing out on significant upside potential. At the same time, "those who excessively cling to the momentum leaders may lose control once the trend ultimately reverses. Alexander Altmann, Global Head of Stock Tactics Strategy at Barclays, is one of the professionals warning that shorting chip stocks at the current time may be premature. Altmann and his colleagues have been answering client questions about whether now is the time to sell chip stocks. In his view, signs of extreme market enthusiasm have not yet spread widely enough to indicate that this rally has reached its end. He stated that shorting the VanEck semiconductor ETF (SMH.US) at this point would be "the end of my career" for him.