(June 18): The risk of market “tantrums” is rising as sharp swings in semiconductor stocks force some investors to cut allocations, according to JPMorgan Chase & Co strategists.
The team led by Nikolaos Panigirtzoglou said a rebound in chip stocks to record highs this week has been accompanied by higher volatility, potentially triggering so-called VaR shocks for portfolios. That’s a scenario where big market moves cause investors to breach their Value-at-Risk limits, requiring them to reduce positions even if they still believe in the underlying trade.
“The proliferation of VaR-sensitive investors raises the sensitivity of markets to self-reinforcing, volatility-induced selling,” Panigirtzoglou wrote in a note.
The Philadelphia Semiconductor Index, which tracks US stocks in the industry, had slumped more than 10% earlier this month on worries that the artificial intelligence trade was overheating. The index has since reclaimed an all-time peak, and a survey by Bank of America Corp this week showed long bets on chipmakers is the most crowded trade among fund managers.
JPMorgan’s Panigirtzoglou said volatility tends to creep higher before an impending VaR shake-up, a trend that took hold before the sell-off in early June. Market liquidity also generally dries up before such a shock.
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Higher valuations also pose a challenge, the JPMorgan team said. Their analysis shows that the share of semiconductor stocks in global indices has risen much faster than their equivalent portion of revenues. At six times, the ratio is more than double the reading for Magnificent Seven stocks in the S&P 500.
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