Tech Keeps Raising the Bar

IBM's results reignite the sector but put even more pressure on Intel and Yahoo! after the close.
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The tech sector, fueled by key positive earnings, is gearing up for the next challenge as tech bellwethers

Intel

(INTC) - Get Report

and

Yahoo!

(YHOO)

will post results after the market close Tuesday. The direction of the broader market, which has been led by techs since the April lows, could well depend on their results.

One after the other, profits for the sector's big guns have positively surprised Wall Street --

Apple

(AAPL) - Get Report

and

AMD

(AMD) - Get Report

last week and

IBM

(IBM) - Get Report

Monday after the close. The latter's results revived the market Tuesday, with the

Nasdaq Composite

taking the lead. The tech-heavy index was recently trading up 21.12 points, or 1%, to 2165.99.

The

Dow Jones Industrial Average

, which counts IBM as a component, was up 56.29 points, or 0.5%, at 10,631.28. The

S&P 500

was up 5.05 points, or 0.4%, at 1226.18.

With investors fretting about overbought conditions in the market, every new report becomes more risky. Both Intel and Yahoo! are expected to post strong results. Intel's earnings are expected to rise to 32 cents per share vs. 27 in the year-earlier quarter. Yahoo is seen posting 14 cents vs. 9 last year.

But even if they beat expectations, the stocks might be "sold on the news," according to Philip Dow, director of equity strategy at RBC Dain Rauscher.

Both stocks have run up since the market's April lows. Intel has gained about 28% and Yahoo! has added about 15% since their April 18 lows. On Monday, both stocks were gaining, with Intel up recently 1.4 % at $28.63 and Yahoo! up 1.2% to $37.79.

Lehman Brothers analyst Douglas Anmuth sees "modest upside potential" to his own estimates of Yahoo's earnings at 13 cents and also believes the company could slightly raise full-year guidance. But this guidance, he says, is "not likely to have a material near-term impact on the stock."

Intel could provide a different story. Based on the company's improving profit margins, Lehman expects the company to lift its earnings guidance by 5% to 6%.

For the bulls, much will depend on this forward guidance. Ken Tower, chief market strategist at CyberTrader, says analyst estimates were "a bit too cautious" for tech earnings heading into the second quarter. But there's now growing expectations that bellwether tech names "will raise estimates for the third quarter," he says. "That's what's buoying the market right now."

And while Tower doesn't expect any huge rally, he believes current sector rotation out of energy shares and basic materials should continue fueling gains for tech stocks for the next couple of weeks. Traders, he says, may want to test the next resistance level on the Nasdaq at 2200 after successfully breaching 2100 two weeks ago.

On the more cautious side, RBC's Dow says techs have been powered by performance anxiety from the trading community, which "feels it cannot miss the next big move upwards."

Hedge funds, in particular, have grown increasingly jittery about poor returns and they are pinning their hopes on the tech sector, he says.

But the market may be entering into "fundamental quicksand" if investors place big bets on techs, given that GDP and earnings growth are decelerating. "It's hard to make a call past the next quarter," he says.

Still, many traders are just looking for some insight into the current quarter and expect to get some from Intel and Yahoo! after the close.