5 signs the semiconductor rally is getting silly

The semiconductor industry is seeing its most significant rally since the dot-com bubble, but several signs suggest the market is overheating.

The PHLX Semiconductor Index (SOX), a key industry benchmark, has rocketed up nearly 54% in the past 25 trading sessions. According to Dow Jones Market Data, this marks its best rolling 25-day performance since it gained 56% at the height of the dot-com bubble on March 9, 2000. The tech-heavy Nasdaq Composite gained 21.8% in the same period.

"Investors are still not fully appreciating the tidal wave of growth on the horizon from the $3 trillion of enterprise and government spending over the next 3 years around AI technology and use cases," Wedbush Securities analyst Dan Ives wrote Tuesday. He added that he is seeing "no cracks in AI demand on the chips/hardware front."

The rally's intensity is drawing comparisons to historical bubbles. After the March 2000 peak, the SOX index plummeted 80% by September 2002. Today, technical indicators are flashing warning signs. The VanEck Semiconductor ETF (SMH) has seen its Relative Strength Index (RSI), a measure of momentum, at an "overbought" level of 70 for 17 straight sessions. The broader SOX's RSI is even deeper into overbought territory at 75.

This historic run raises the question of whether the chip sector has flown too close to the sun, presenting a "bubble watch" scenario for investors. The rally is extended, with the SMH ETF trading more than 40% above its 200-day moving average. While initially driven by Nvidia (NVDA), the gains have broadened to include laggards like Intel (INTC) and Qualcomm (QCOM), with every stock in the SOX index gaining 14% or more over the past 25 sessions.

Froth or Fundamentals?

The core driver is the insatiable demand for processors for artificial intelligence. Supply bottlenecks for critical components have led Wall Street analysts to raise profit forecasts, and strong earnings have bolstered investor confidence. However, the sheer speed of the ascent is causing some veteran market watchers to urge caution.

Michael Burry, the investor famed for his bet against the housing market portrayed in "The Big Short," has purchased more put options on the iShares Semiconductor ETF (SOXX), betting on a downturn. These contracts, set to expire in January 2027, signal his long-term bearish view on the sector.

Signs of a Top

Here are five signs that the rally may be overextended:

Historic Rally Pace: The 54% gain in 25 days is a statistical outlier, rivaling the peak of the last major tech bubble.
Overbought Technicals: RSI readings above 70 on major semiconductor ETFs suggest that the rally is losing momentum and a pullback may be imminent.
Extreme Extension: The VanEck ETF is trading 40% above its 200-day moving average, a sign of potential over-extension from its long-term trend.
Broadening of the Rally to Laggards: While a broadening rally can be a sign of health, the fact that even perennial underperformers are seeing massive gains can also be a sign of indiscriminate buying and market froth. Top performers like Intel, Credo Technology (CRDO), and Astera Labs (ALAB) have each gained more than 100% in the period.
Contrarian Bets from Noted Investors: When famed contrarians like Michael Burry make significant bets against a sector, it can be a sign that the "easy money" has been made.

While some analysts remain bullish on the long-term AI trend, the current market dynamics suggest investors should proceed with caution. The coming months will show whether this is a sustainable super-cycle driven by AI fundamentals or a speculative bubble on the verge of popping.

This article is for informational purposes only and does not constitute investment advice.

5 signs the semiconductor rally is getting silly

Priya Mehta

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