With one more session to go, the Philadelphia Semiconductor Index is up 11% in May, its strongest performance since October 2003, as many of the largest components are logging the largest gains. But can the momentum continue?

Intel

(INTC) - Get Report

is up 16% to $27.39 this month, with shares dropping in only two May sessions.

KLA-Tencor

(KLAC) - Get Report

,

Marvell Technlogy Group

(MRVL) - Get Report

and

Broadcom

also have posted gains in excess of 15%.

These gains also have helped stocks break some recent technical barriers, most notably Intel, which moved soundly past $25, and the

Semiconductor HOLDRs

(SMH) - Get Report

exchange-traded fund, which advanced beyond $33 to challenge a 10-month high of $35.

"You just don't see stocks go up in a straight line like that," says Scott Curtis, director of trading at Kinetics, a New York-based money-management firm. He credits the most recent move to portfolio managers reallocating holdings into high-tech stocks from energy and cyclicals. Indeed, the highest-profile tech names have run up the most. The

Nasdaq 100

has added 9% this month, compared with an 8% jump for the

TheStreet Recommends

Nasdaq Composite

and a 3.7% move higher for the

S&P 500

.

Curtis expects the May surge to result in a brief consolidation period, but he predicts the rally will regain momentum in the fall because of continued economic strength. "In the short term, we're probably a little overbought, but in the longer term, this bodes well for technology."

Any certainty regarding chip stocks has been difficult to glean this year, as they've wavered throughout the year on alternate views on the strength of demand. For the year, the SOX is flat, still 4% below a one-year high reached at the end of February, but 12% above its closing 2005 set in mid-April.

But stocks

started rallying in May, when first-quarter financial reports began to trickle in steadily. Most of the reports reflected seasonal results and expectations that were neither overly enthusiastic nor pessimistic.

Other factors helping stocks included retreating energy prices and continued economic strength, as evidenced by Wednesday's upward GDP revision that pushed the Nasdaq to its

highest close in almost three months. The prospect of ongoing overall strength in the economy is what has many investors hopeful of sustainable gains.

"It's inconceivable to me that the world would boom and

the semiconductor sector won't participate," says Frank Husic, CIO of San Francisco-based Husic Capital Management.

Earlier in the year, Husic, who manages about $500 million, thought the chip sector was on its way to significantly higher levels, when the chip index went on a six-week run beginning in mid-January. But those gains faded as rising energy prices and second-half demand concerns spooked investors out of the sector.

"Searching for bottoms is not so easy, otherwise everyone would be rich," cautions Husic, who noted the powerful run in the SOX from late 2002, when the index bottomed at 214 to a high of 560 in January 2004. "The index came off the bottom like it was supposed to, outperformed everything in sight and then reached this top," says Husic. He viewed the drop back to 350 in mid-2004 as a digestion of those gains. "I've been looking for a second leg up."

Unfortunately, each of the last two years has offered a false spring start, with the SOX jumping substantially in May, only to trade flat or fall in June.

Because semiconductor stocks are considered by investors to be tech leaders and active trading vehicles, they generate an inordinate amount of attention at the start of a rally. This keeps some tech stalwarts leery of jumping into the sector after a strong run. "When diversified fund managers want tech exposure, they use semis for the beta. That would mean that semis, relative to other tech sectors, are overvalued," says Tom Telford, portfolio manager of the American Century Technology Fund, based in Kansas City, Mo.

Telford still sees some positive aspects for chip companies, such as low valuations, substantial cash flows and balances, and good growth rates. But, he says, "I don't see things that set them apart from other sectors." He's shifted his holdings to larger companies, with a bias toward software.

As for whether the current rally holds, Telford, too, thinks macroeconomic factors will carry the most weight.

Though chip stocks have been running because of growing confidence about business during the second half of the year, investors in this sector are legendary for having short attention spans.

Most standing predictions for 2006 are calling for anemic growth of PCs and semiconductors. As more expectations surface about the coming year -- Gartner made some initial comments last week about single-digit PC growth in 2006 -- look for chip stocks, and tech in general, to start pricing in this information ahead of declining fundamentals.