Technology stocks bounced higher yesterday, despite generally tepid earnings reports. The Nasdaq composite index was ahead 1.8%, while the Philadelphia semiconductor index rose 2.3%. Is it time to jump back in?

Until yesterday, technology stocks appeared as stale as last week’s bread. They had had a miserable three months, buffeted by poor computer sales, weak pricing in some sectors, delays in new product launches, and concerns about the industry’s involvement in the options backdating scandal. The Morgan Stanley technology index was off 16.6% from its high in April, and down 7.5% over the past year.

Tuesday’s disappointing earnings announcement and sales projection from Yahoo (YHOO $24.40) fed investors’ impatience with the group, raising more concerns about a cyclical slowdown. Earnings of 11 cents a share were a penny shy; yesterday, the stock was off a shattering 21%.In fairness, the company also announced that its new search-advertising technology would be delayed.

Wall Street’s optimistic interpretation of the Federal Reserve chairman’s remarks before Congress and slightly positive results from IBM (IBM $76) lifted market sentiment yesterday. Nonetheless, few investors appear tempted to look for value in the sorrowful tech lot.

One fund manager, Jim Vanasek of VN Capital, describes the group as having hit an air pocket. In his view, large tech stocks are no longer capable of reporting the kind of earnings gains that attract growth stock managers, while value players do not yet view the shares as compelling.

Peter Brookvar, equity strategist for Miller, Tabak, breaks the industry into two groups — manufacturers of consumer products like iPods, laptops, digital cameras, and the like, and those companies that sell to businesses. In his view, the outlook for both sectors is poor, and likely to get worse.

“A slowdown in consumer spending is in place, and it will certainly affect tech stocks,” he says. “If a consumer isn’t going to go out for a steak dinner, neither is he going to buy a new iPod.”

At the same time, corporate IT spending simply isn’t happening, according to Mr. Brookvar. He points to the recent orders numbers from IBM and similar news from Oracle (ORCL $15). Mr. Brookvar says he thinks we are in the middle of a bear market in tech, and that the group may sink lower.

Our question is: Can you be positive on the market and not be a tech buyer? The head of Cumberland Associates, Bruce Wilcox, thinks so. “Areas such as financials, health care, and energy can do well, and can push the market higher,” he says.

However, Mr. Wilcox says he feels that if there is a secular case to be made, it has to come from a potent capital spending wave from corporate America. Therein lies the rub: With nearly every market watcher concluding that consumer spending is finally weakening as a result of higher oil prices, stepped up interest rates, and only modest income growth, all eyes are on corporate capital spending to fuel growth in the second half.

Productivity gains have been central to the economy’s health and to the stunning rise in corporate profits in this cycle. As companies look to reinvest some of those earnings, surely tech companies will benefit. Ergo, if you are optimistic about the economy sustaining reasonable growth in the second half, don’t you almost have to be a tech buyer?

A tech strategist at Cowen & Company, Arnie Berman, agrees with this analysis, and would add a few other reasons to consider investing in tech shares. He thinks that “negative sentiment is now so pronounced” that at least a short-term rebound is possible. He points out that tech stocks have a history of moving in whichever direction makes the most people miserable; right now, that would suggest a rally.

More significantly, there are pockets of strength in the sector, which will likely improve further as capital spending rises.The most obvious of these is companies that benefit from investment from the telecom companies. This industry has cash to spend, and unlike much of corporate America, seems less confused about what to do with it.

Cisco (CSCO $18.19) is an obvious beneficiary of rising telecom investment spending, according to Mr. Berman, as it is involved in a wide spectrum of IT products. Over the past 52 weeks, the stock is off 11%, while the S&P 500 is about flat. Although that is better performance than turned in by some tech stocks this year, it is still relatively attractive. An equity research analyst at Bank of America, Tim Long, is also recommending Cisco. In a report dated July 17, Mr. Long states: “We believe Cisco represents the best ways to play the strength in enterprise networking and that recent weakness presents a favorable entry point.”

Other stocks likely to be helped by an upturn in telecom spending are Lucent (LU $2.10), Juniper (JNPR $14), and Nortel (NT $2.09). These companies are off 32%,46%,and 25%,respectively, over the past year.

Mr. Berman would go one step further, and investigate semiconductor vendors such as PMC-Sierra (PMCS $7.14) and Xilinx (XLNX $21.90).After starting out the year well, semiconductor companies have been hit by concerns over building inventories. These companies “supply the suppliers” as he says, and also will see rising orders as capital spending increases.

Mr. Berman is not convinced that a near-term rally in the tech sector (which may have just begun) will carry through the fall. It could turn out to be a false start. However, moving into 2007, he would expect to see the group gain momentum. As we approach 2007, the belated resolution of some of the new product issues, such as the introduction of Microsoft’s VISTA and Yahoo’s new search model, will wane. It is also likely that options backdating will come to be viewed as a practice that extended beyond the tech sector.

What the group really needs is to rally those hearty enthusiasts who couldn’t get enough of these stocks when they were selling at much, much higher prices. But, it’s awfully hard to find those people.

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