Closely watched hedge fund manager Dan Niles is taking note of unsettling activity that's getting more ominous every time the stock market hits a new high.
Niles, formerly a top chip analyst on Wall Street, says there's too much complacency among investors, especially when it comes to semiconductor stocks. If those stocks see a sell-off, it could drag down the rest of the market, the founding partner at AlphaOne Capital Partners said Tuesday on CNBC's "Trading Nation."
"The longer it keeps climbing and the higher valuations go, the more nervous I become," Niles said. "We're long overdue for a correction. This is the second-longest bull market since World War II."
The iShares PHLX Semiconductor ETF has soared 67 percent in the past 52 weeks, a growth rate that Niles says is unsustainable.
"If you look at semiconductors — which is where I have the real problem — the semiconductor index in 2016 was up 37 percent. The revenue growth was 2 percent. This year, the semiconductor index is up 18 percent, and the revenue growth is maybe 5 percent," said Niles.
Semiconductor companies, which are considered a highly cyclical area of tech, are facing serious demand challenges, according to Niles.
Not only are they trying to cope with a PC industry that's on track to see its sixth-straight year of softer sales, a struggling auto industry could also cause semis to come home to roost as early as summer, he said.
"China's auto sales last year were really stimulated by the fact that they cut taxes down to 5 percent from 10. So that went ahead and really ramped up auto sales last year into the double digits. The most recent month, it went negative," said Niles. "In the U.S., we all know what is going on with Ford."
Ford is planning to cut about 10 percent of worldwide workforce, sources told CNBC.
"This market is very concentrated to say the least. But I think you do have to look at the individual names within the market," said Niles, who's still positive longer-term on internet stocks, particularly Facebook and Alphabet.
"This is nowhere near 2000 where you had stocks selling pet food on the internet that were over a billion dollars," Niles said.
"Quite honestly, I am not as worried about the internet companies because here you're talking names that are growing 20 percent-plus. If you can think about it logically, if they go up 20 percent a year, they are just keeping up with their growth rates. In fact, if Facebook [stock] doesn't go up 40 percent, it's getting cheaper every year."