RJ Hamster
Are You Holding the Next Cisco?
“This semiconductor setup reminds me exactly of the dot-com bubble.”
Chris “CJ” Johnson, Lead Host & Senior Analyst, Monument Traders Alliance
Dear Reader,
They say history does not repeat itself. It rhymes.
And right now, the semiconductor sector is turning in a performance that’s a carbon copy of what we saw just ahead of the dot-com bubble bursting in 2000.
Am I worried? The short answer is yes.
If investors want to identify when the AI bubble is approaching its breaking point, semiconductors may provide the earliest warning signs. That was true during the dot-com era, and it is becoming true again today.
I remember the dot-com blowup vividly. It was one of the first major lessons I learned on sentiment analysis.
Back then, the conversation was exactly what you hear today. Investors argued that innovation had permanently changed the economy and traditional valuation metrics no longer mattered. Technology stocks could only move higher because the internet was going to reshape the world.
To be fair, the internet did reshape the world.
The problem was that investors became so convinced of the long-term story that they ignored the short-term reality of speculation and sentiment extremes.
Why the Semiconductors Matter
The backbone of the dot-com movement was not the flashy internet companies everybody remembers today.
It was semiconductors and networking infrastructure.
Cisco (CSCO), Intel (INTC), Qualcomm(QCOM), and the companies that built the hardware became the center of the feeding frenzy.
Today’s AI boom is following the exact same roadmap.
AI requires enormous computing power. That means surging demand for semiconductors and AI infrastructure.
Companies like NVIDIA (NVDA), Broadcom (AVGO), AMD, and Micron(MU) have become the picks-and-shovels behind AI.
This is why semiconductor stocks matter so much right now.
When investors believe a technological revolution is underway, capital floods toward the companies supplying the infrastructure needed to support it.
The rally is astronomic, but eventually, expectations become impossible to satisfy.
I call it “priced to perfection”, which is close to where we are today.
This is the stage investors need to monitor carefully, and semiconductors are where the warning signs will likely appear first.
A Look at the “History”
Over the last 30 trading days, VanEck Semiconductor ETF (SMH) surged more than 45%, briefly pushing toward a 50% gain.
That type of move is statistically rare and historically important.
But more importantly, it closely mirrors what happened during the final stretch of the dot-com bubble in early 2000.
I recently went back through the historical data to study periods where SMH rallied more than 45% over roughly a 30-trading-day period.
There were very few occurrences. The most obvious cluster happened during the late stages of the dot-com bubble between late 1999 and March 2000. Another smaller cluster occurred during the speculative rallies of 2021 and 2022.
Now, the signal has appeared again.
For those keeping score, the semiconductor ETF dropped an average of 17% over the 45 days following the signals identified.
Here are the same “signals” presented on SMH’s chart.
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The timing is difficult to ignore.
Back in the late spring of 2000, semiconductor stocks exploded higher before carrying the broader market into the seasonally weak June-September period and second-quarter earnings season.
Expectations eventually became too aggressive, momentum cracked, and the market rolled over.
That setup is almost identical to what we’re seeing now.
The hyperscalers are spending hundreds of billions of dollars building AI infrastructure. Investors continue rewarding anything connected to AI compute demand. And semiconductors have become the center of the speculative momentum trade.
At the same time, market breadth is narrowing.
Fewer stocks are driving a larger percentage of the market’s gains. That creates fragility beneath the surface because markets become increasingly dependent on a shrinking leadership group continuing to perform perfectly.
The following chart displays the percent of stocks in the Nasdaq 100 Index (QQQ) that are trading above their respective 50-day moving averages.
The lack of breadth in the current rally signals a more fragile market that could be dashed by a simple pullback in the semis.
That was one of the defining characteristics of the dot-com peak.
It’s also why semiconductors act as the canary in the coal mine.
When momentum begins to fade, expectations soften, or earnings guidance disappoints, semiconductor stocks will likely react first because they sit at the center of the AI infrastructure trade.
Any disruption to the narrative can create rapid shifts in sentiment.
Be Patient, Not Bullish
This does not mean the rally ends tomorrow.
In fact, history suggests semiconductor stocks can continue climbing for several weeks after these extreme momentum signals appear. That’s likely the phase we’re in now.
As Nate Bear pointed out during our recent discussion: “We have seen this movie before, and we know how it ends. However, we have no flipping clue how far along in the movie we are.”
Fighting momentum too early is dangerous. But ignoring sentiment extremes is equally risky.
The best approach right now is preparation and discipline.
First, don’t be afraid to pay yourself on the way up. Taking profits into strength is disciplined portfolio management.
Bulls make money, bears make money, and pigs get slaughtered.
Second, use trailing stops. Trailing stops act as circuit breakers that remove emotion from the process. When momentum eventually reverses, having predefined exit levels becomes critical.
Finally, start building a shopping list for the next correction. The best opportunities are created when fear replaces greed.
The problem is that most investors freeze when volatility spikes and stocks collapse. Creating a wish list with target prices ahead of time allows you to act rationally when everyone else becomes emotional.
The AI trade is far from dead.
AI will likely reshape the economy for decades just like the internet did.
But the semiconductor sector is warning investors that sentiment is becoming stretched.
That doesn’t mean the bubble has burst. It means the canary is starting to chirp louder.
I chirped extensively about this on Tuesday.
Click here or on the image below for the details. Want more content like this?
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