Chip stocks are soaring, but JP Morgan has thrown cold water on it: a "stampede-style selling triggered by volatility" may be imminent.

Recently, the J.P. Morgan strategy team issued a warning that the drastic volatility of semiconductor stocks has forced some investors to reduce their positions, and the risk of the market experiencing "severe volatility" is increasing. Led by Nikolaos Panigirtzoglou, the J.P. Morgan strategy team pointed out that while chip stocks rebounded to historic highs this week, volatility has been climbing simultaneously. This could trigger a so-called "Value-at-Risk" (VaR) shock to investment portfolios. In this scenario, the severe volatility in the market could cause investors to exceed their VaR limits, forcing them to cut their positionseven if they still believe in the underlying logic of the trade. "The increasing sensitivity to VaR among investors raises the market's sensitivity to 'self-reinforcing selling triggered by volatility,'" Panigirtzoglou wrote in the report. The VaR model is used to estimate the maximum potential loss a portfolio could face within a given time period. When actual volatility exceeds the model's assumptions, investors are forced to reduce their exposure to keep risk within limits, forming a feedback loop: selling triggers more volatility, leading to further selling. The Philadelphia Semiconductor Index, which tracks the U.S. semiconductor industry, plummeted by over 10% earlier this month due to market concerns of overheated artificial intelligence (AI) trading. However, the index quickly rebounded and reached a historic high above 14,000 on June 15. Year-to-date, the index has surged by approximately 90%. The J.P. Morgan strategy team warned that volatility usually escalates gradually before the imminent VaR shockthis trend was evident before the selloff in early June. Additionally, market liquidity tends to dry up before the shock occurs. Concerns of overcrowded trades and high valuations Meanwhile, a global fund manager survey released by Bank of America this week showed that 80% of respondents believed that going long on semiconductor stocks has become the "most crowded trade" in the current market, a record high in the survey's history. The J.P. Morgan team also pointed out that high valuations pose a challenge. Their analysis shows that the growth rate of semiconductor stocks' weight in global indices is much faster than their proportionate share of total revenue. Specifically, this ratio has reached six times, more than twice the level of the "Fab 7" in the S&P 500 index. These factors could lead to a sudden deleveraging in the semiconductor sector that could impact the entire tech sector and major indices, potentially reversing recent gains.