After wallowing in the red for two months, semiconductor stocks jumped Thursday.

The Philadelphia Stock Exchange Semiconductor Index finished up 3.7% to 485, helped by upbeat comments on demand from executives at Applied Materials ( AMAT) and Micron ( MU).

But Thursday's session was an anomaly vs. the recent norm. The SOX entered Thursday's session down 16.5% from its Jan. 12 high and on Monday had fallen below its 200-day moving average for the first time since mid-April 2003.

So it's an open question whether Thursday represented merely a technical reversal after a pronounced slide, or the beginning of a new uptrend for the sector. Notably, many money managers remain leery, dismissing Thursday's bounce as a short-term move for a sector that's still far from a bargain.

"The upside is priced in," summed up Jerome Dodson, manager of the ( PARNX) Parnassus Fund , which doesn't have any holdings in chip stocks.

Dodson would like to see chip stocks fall another 15% or so before becoming a buyer. He expects the stocks to fall further in the summer leading up to the back-to-school season, when market sentiment tends to pick up along with seasonal demand.

Romeo Dator, who co-manages the ( GBTFX) All-American Equity fund at U.S. Global Investors, argued chip stocks have gone from expensive to "close to fairly valued." But he says they don't yet look like good values.

Indeed, chip stocks still trade at a premium to the market. The average forward price-to-earnings ratio for semiconductor companies in the Dow Jones Semiconductor Index stands at 25.6 for 2004 and 19.7 for 2005 vs. 17.5 for 2004 and 15.7 for 2005 for the S&P 500, according to Thomson First Call.

"I think sometime in the next 12 months we'll reach a cyclical peak," said one hedge fund manager who's not invested in the group. "And a cyclical group ought to trade at a low multiple on peak earnings."

The source, who asked to remain anonymous, expressed concern about the zeal among many traders for this notoriously volatile sector.

"What worries me is just the number of people I talk to who've been saying -- when the tape is going straight down -- that they're going to wait for the next bounce before they take a position," he said. "I think we're in for a little bit of a rougher period until summer," noting that the second quarter tends to remain relatively weak.

Conversely, RealMoney.com contributor Tom Kurlak offered an upbeat assessment of chip fundamentals earlier this week.

Slowing From Blistering Pace

Amid arguably pricey valuations, Wall Street expects momentum in chip company earnings to diminish throughout 2004 -- albeit after getting off to a spectacular start.

First-quarter profits for chip and semiconductor equipment companies are expected to show an astonishing improvement compared to the prewar sluggishness at the beginning of 2003. Earnings for the group should leap by 573% on a year-over-year basis in the first quarter, according to Thomson First Call, based on analyst estimates for 72 stocks in the group.

Those expected gains far exceed projected growth of 54% for the broader S&P Technology Index, noted Thomson First Call analyst Ken Perkins.

But chip sector growth is expected to decline sharply in 2004, Perkins noted, with expected year-over-year earnings gains of 260% in the second quarter, 109% in the third quarter and 45% in the fourth quarter.

Still, chip company executives themselves sound optimistic about their growth trajectory. On Wednesday, Applied Materials' executives said the semiconductor industry is in the early stages of an upcycle. Micron also provided an upbeat outlook, although its stock missed Thursday's rally.

Earlier this month, Intel's ( INTC) CFO said he expects the enterprise market to see a "slow, steady upgrade cycle."

If the industry follows previous patterns, chipmakers can expect at least another year of solid growth before a cyclical downturn gets under way.

The current expansion in the semiconductor industry has lasted eight quarters, as of the fourth quarter of 2003, compared to an average expansion that lasts 12.8 quarters, according to World Semiconductor Trade Statistics, a nonprofit group.

There can be plenty of variation in expansion times. But based on the average cycle's lifespan, some fund managers view the recent selloff as a buying opportunity in flagship chip play Intel, as well as lower-profile semiconductor names .

But others are sitting on the sidelines.

While more aggressive traders are buying in anticipation, Dator wants to see evidence that corporations are actually increasing IT spending before he gets more bullish on chip names. "Then we'll be believers," he said, noting "we don't really see any evidence of that" yet.

For now, Dator favors wireless chips vs. PC plays, with stakes in Texas Instruments ( TXN) and Analog Devices ( ADI). "We're really seeing very strong demand for wireless," he said. "Asia had the replacement cycle first with the new camera phones, but America is starting to adopt it as well."

Yet the share price trend at Texas Instruments only underscores Wall Street's diminished enthusiasm for chips. On March 8, TI lifted its first-quarter sales and earnings outlook, saying it had seen strong demand across its lineup and that prices for its commodity chips were rising, reversing a three-year decline. But its shares traded down slightly the next day.

The selloff "kind of surprised us," admitted Dator. "Several of the semi companies have been giving very positive guidance and upping their numbers for the quarter, and the stocks haven't been reacting."

But Thursday's spike in chip stocks suggests that trend could change.