Updated from 7:17 a.m. EDT

News late Tuesday from

Applied Materials

(AMAT) - Get Report

, which posted

better-than-expected results, suggested to some that the market's nascent rally might continue today, at least in the early going.

Equity futures were higher Tuesday evening in the immediate aftermath of the chip-equipment giant's report although they eased overnight and were recently trading slightly down.

But perhaps more important than the prevailing question --

will the rally continue?

-- is the question over whether the migration into previously out-of-favor groups such as big-cap tech, telecom and biotech, and out of previously favored groups such as gold miners, health care, consumer staples and even small- and mid-caps continues.

Models measuring big-caps vs. small-caps suggest "exhaustion" of the prior trend of outperformance by small-caps, said Morgan Stanley chief technical strategist Rick Bensignor. But that is only indicative of a "potential turning point," with more time necessary to confirm a new trend is in place. Still, he suggested "now is not the time to put on a small play vs. a big play," recalling a

discussion here last week.

"One week does not a trend make," countered John Bollinger, president of Bollinger Capital in Manhattan Beach, Calif. "You need to look for intermediate-term deterioration in the trend, which could take weeks."

Bollinger, a longtime bull on small- and mid-cap stocks, suggested "big transitions usually take longer" to emerge than just a few trading days.

Still, the Russell 2000 and S&P MidCap 400 each rose 2.4% Tuesday; the S&P Healthcare Index rose 1.4%; and the Morgan Stanley Consumer Index gained 0.7%. Those gains trailed those sported by the Nasdaq 100, Philadelphia Stock Exchange Semiconductor Index, and the Amex Biotech Index, which rose between 5.2% and 6.3%. The Philadelphia Stock Exchange Gold & Silver Index was the big laggard, falling 5.5%.

Recent activity begs the question over whether this is merely a countertrend rally, and due to falter shortly, or a more fundamental and sustainable rotation out of what has been working and into what hasn't.

"That is the important question," said Bert Dohmen, president of Dohmen Capital in Los Angeles and editor of the

Wellington Letter

, who forecast the switch last week. "I don't think that

trend is going to last very long -- I wouldn't expect more than four weeks."

Four weeks is a long time for traders, but "serious investment money is not going into these out-of-favor areas like tech and telecom," Dohmen said. "Therefore, any rally is going to be short term in duration and fueled by short-covering."

The newsletter writer suggested "those that got in early will be exiting once the public starts going into these stocks again," which will be evidenced by a big increase in volume. "We did get a perfect pattern for a short- or intermediate-term bottom, so there is enough to sustain the rally for several weeks, but I wouldn't overstay, especially in those overpriced areas."

Clearly, tech's allure remains strong for many investors, as the past week has indicated. But Dohmen recalled that groups that experience "blowoff tops," like tech/telecom did in the late 1990s/early 2000, often take 10 to 20 years before coming back to prior peaks, even though underlying business doesn't keep deteriorating. For example, most biotech stocks remain below their 1991 tops even though that industry has recovered, he noted.

"People have to stop beating that dead horse -- forget tech, forget chasing a rally like this in tech," he said. "This is not for serious money, you just want to trade it and get out and concentrate" on sectors with stronger fundamentals, such as homebuilders, specialty restaurants, gold miners and casinos. (The S&P Homebuilding Index rebounded from early losses Tuesday to close up 5.9%, a particularly impressive move given the benchmark 10-year Treasury note fell 17/32 to 96 27/32, its yield rising to 5.29%.)

Dohmen declined to give specific names but said "the next big buying opportunity" in those groups is coming, as they'll correct while high tech returns to favor, at least for the short term.

Tuesday's Takeoff

A second-straight session of robust gains, Tuesday's accompanied by solid volume and a fundamental macro catalyst, has some market participants rethinking their skepticism. Meanwhile, those who wanted to believe in the significance of last Wednesday's rally were scrambling to get more exposure to big-cap stocks, particularly of the tech variety.

Buoyed by stronger-than-expected retail sales data for April, the

Dow Jones Industrial Average

rose 1.9% to 10,298.14, the

S&P 500

gained 2.1% to 1097.28 and the

Nasdaq Composite

jumped 4% to 1719.05.

Particularly encouraging was that major averages closed above the highs reached May 8, of 10,148.94 for the Dow, 1088.85 for the S&P 500 and 1696.35 for the Comp. Additionally, the Dow eclipsed both its 20- and 50-day moving averages of 10,049 and 10,260.56, and the S&P bested its 20-day moving average of 1086.20, which is a short-term bullish sign.

Furthermore, market internals reflected a broad advance. In

NYSE

trading, 1.4 billion shares traded while advancing stocks beat decliners 22 to 9. In over-the-counter action, 2.2 billion shares were exchanged while gainers led 24 to 11. Volume exceeded the year-to-date daily average on both exchanges, but naysayers said neither volume nor breadth was overwhelmingly positive.

Additionally, more than 630,000 million shares of

WorldCom

(WCOM)

traded after the beleaguered telecom giant was removed from the S&P 500, forcing index funds to sell it. Still, up volume totaled 78.5% of Big Board trading and 68.6% of over-the-counter activity, where up volume was totally dominant (excluding WorldCom), about 15 to 1.

"It's certainly impressive to put two days back to back, and I don't think anyone expected today to have

this type lift, especially off retail sales," said Morgan Stanley's Bensignor.

While retail sales gave the futures a big lift in preopening trading, other catalysts for the rally included strong earnings from retailers

Wal-Mart

(WMT) - Get Report

,

J.C. Penney

(JCP) - Get Report

and

OfficeMax

(OMX)

, as well as optimistic comments about

Intel

(INTC) - Get Report

by Robertson Stephens.

"It's almost like there's panic buying -- people are afraid they're going to miss something," Bensignor continued. "Whether or not we can find enough strength to follow through is what the market will need to judge" whether a sustainable rally for big-cap proxies has begun.

The aforementioned results from Applied Materials seem likely to inspire more panic buying, or at least follow-through. Many investors were pinning their hopes on the chip-equipment maker, which posted fiscal second-quarter earnings of 3 cents per share, a penny ahead of expectations but down from 21 cents a year ago. The company's revenue exceeded expectations and, perhaps most tellingly, AMAT cited "strong demand" for its products and reported new orders rose to $1.7 billion. Estimates were for $1.1 billion in the first quarter.

Prior to Applied Materials' report, Bensignor said the S&P 500 is likely to hit resistance between 1100-1125 and observed "many different resistance points between here and 1175." The index peaked near that level in early December, early January and twice in March, resulting in a "quadruple top," he said. "This is going to be the toughest rally of the year to play, but maybe that means the market needs to rally."

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.