As the second-quarter earnings season gets under way, festive tech investors are all but donning lampshades for party hats. And there's reason to celebrate: The

Nasdaq

has sashayed up 28% since the beginning of the year, compared with the

S&P 500's

more sedate 12% growth.

The benchmark for chips, the Philadelphia Stock Exchange Semiconductor Index, has leapt even higher, up 35%.

But not everybody's feeling so cheerful in techland. Corporate insiders -- the folks who ought to know better than anybody else where the industry's going -- look like downright sourpusses these days. In the second quarter, insider sales surged to their highest level in more than a year, while monthly insider buys of stock by tech executives slumped even more dramatically, to the lowest level since 1997.

Why the big jump in insider selling? Some of the cash-outs may have happened because options are finally in the money again. But even if that's the case, the takeaway is that many tech executives don't see much upside in their companies' stock prices.

The rash of selling suggests that, in the best case, management doesn't believe shares have much room for appreciation. In the worst case -- if third-quarter outlooks disappoint, there's a risk that tech stocks could lose a chunk of value.

"Insiders have been selling like there's no tomorrow," says Christopher Whalen, an analyst at research boutique Ramberg Whalen who argues that tech has "run to silly levels." His take: "I think the smart money's taking profits now and all that's left are the big retail funds that have been dying to get in."

Chris Bonavico, manager of the

(TPAGX)

Transamerica Premier Aggressive Growth fund, says that heading into the second half of the year, he expects tech companies to show "modest improvement." "But that doesn't argue for continued high-beta, shoot-the-lights-out performance," he adds. His fund is underweighted in technology.

Certainly, tech execs have been heading for the exits even as funds and retail investors have been clamoring to buy their stocks. As the market took off in the second quarter, insiders opportunistically dumped their shares to the tune of $1.6 billion (a total that doesn't include single sales of $50 million or greater).

The selling occurred at nearly triple the pace of the preceding quarter's $600 million and double the $800 million in sales for the same quarter in 2002, according to Lon Gerber, director of insider research at Thomson Financial. (Estimates reflect activity at about 1,520 technology companies.)

And the second-quarter figures would be even bigger after accounting for a spate of sales valued at greater than $50 million. (Thomson doesn't include these massive sales in its figures because they tend to be done for philanthropic reasons, and so aren't considered a good indicator of future stock performance.)

Case in point: CEO Steve Ballmer garnered headlines in late May for his eye-catching sale of 49.4 million shares of company stock

worth at least $1 billion. Granted, Ballmer has legitimate reason to diversify his huge concentration in

Microsoft

(MSFT) - Get Report

by selling some stock. He still owns more than 421 million shares. But the fact that he chose to sell now merits attention.

Ballmer's company has seen more insider selling than any of its tech peers, with executives cashing out more than $108 million in stock in the second quarter (excluding the $1 billion Ballmer sale). It's not necessarily surprising that Microsoft would see a lot of insider selling on a dollar basis, because it's such a large company. But it's notable that selling has shot up so dramatically since the same quarter last year, when sales amounted to a mere $26 million.

Moreover, lots of Wall Streeters

have lately argued the stock is overvalued even though its shares have lagged well behind the rest of tech, rising only 4% year to date. Its own outlook hardly dazzles: When Microsoft last reported earnings in April, it cut sales and profit projections for the year

below analysts' expectations.

Dell

(DELL) - Get Report

has seen its insider sales surge even more dramatically than Microsoft, from $7 million in the second quarter of last year to nearly $104 million this year. That figure doesn't count CEO Michael Dell's cash-out of nearly $300 million in company shares in late May.

Dell's other top two honchos also have done some heavy selling in the past six weeks, with CFO Jim Schneider cashing in options worth $12.5 million and President Kevin Rollins exercising $7.7 million worth of options.

How does this square with Dell's prospects? Michael Dell has gone on record saying the economy is stabilizing, and his company continues to reliably show up peers with double-digit year-on-year sales and profit growth. Still, even optimists aren't expecting a blowout performance for PCs this year -- and despite Dell's moves into new markets, computers still account for four-fifths of the company's revenues. With shares hitting a 52-week high Tuesday at $34.02, there's reason to think its price is close to topping out.

Despite the heavy selling, fund manager Bonavico says both Microsoft (which he owns) and Dell (which he doesn't) deserve credit for reforming options policies, will ultimately will boost returns. Microsoft just announced it will

replace stock options with awards of restricted stock, while Dell said earlier that it will cut its options giveaways in half this year.

"They're all realizing revenue growth ain't going to be what it was in the past, so they'd better get returns on capital via more efficient capital allocation," Bonavico said.

Meanwhile, plenty of other companies that have shied away from reform have nonetheless seen their stock prices soar at the same time insiders have been cashing out. Take

eBay

(EBAY) - Get Report

, up 65% this year. As of late May, eBay CEO Meg Whitman had

pocketed $57.3 million from the sale of 685,000 shares -- an amount equivalent to 9% of her holdings at the start of the year.

"eBay is a phenomenal business that generates nothing for its shareholders," says Bonavico. "It's screamingly expensive at over 100 times reported earnings."

Of course, selling patterns reveal only half the picture. Another key sign of insider confidence, purchases of company stock, also bodes ill for both the broad market and for tech.

"Buying has been really light for about a year and a half," says Gerber. "We kept thinking there'd be bargain hunting, but actually for the last quarter the buying for the overall market has been around $270 million. That's the lowest quarterly number since 1995."

Within tech, insider buys slipped to $22 million in the second quarter -- far below the five-year average of $100 million. The pace of insider tech purchases fell even more toward the end of the quarter, ebbing to a mere $1.9 million in June. That compares to a more typical monthly average of about $34 million in insider tech stock buys. "That stood out as another bearish indicator," Gerber says.

Granted, all this doesn't mean tech stocks couldn't climb higher still. It just shows up a big nervous streak among the people most familiar with tech fundamentals.

For that matter, it's debatable whether the market cares much about fundamentals at this point. Starting this spring, many stocks kicked off heady run-ups despite little evidence of improving tech demand.

"Is it time to short tech stocks?" asks analyst Whalen. "I say yeah, maybe -- but don't argue with that elephant if he wants to run up the hill. I think funds and investors who can sell short want to very badly, but they're also chastened by what they've seen in the last two months."