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Stocks Stall Out Without Tech Engine

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Stocks have been struggling to break out to new highs, and it may be tech that helps decide which way the market goes.

Tech, the worst performer of the year so far, lagged again Tuesday, as the Dow and S&P 500 broke out to new multi-year highs, and the Russell 2000 and S&P midcap 400 rose to all-time highs.

"The Nasdaq just isn't following. We're at 3186, and we still haven't closed over the 3200 number," said Paul LaRosa, market technician with Maxim Group. LaRosa said the Nasdaq, largely driven by tech stocks, has to join the rally in order to confirm the market's move higher.

"You really have to look at what could be a negative divergence if the Nasdaq can't close above that," he said, adding that the longer it goes on, the more likely there will be a sell-off.

(Read More: Goldman Sachs Cuts Global Stocks as Rally Stalls)

The Dow was up 47 points Tuesday at 14,018, and the S&P rose 2 to 1519. The Nasdaq, however, was negative, losing 5 points to 3186. It was financial stocks that led the market higher, with a near 1 percent gain in the S&P financial sector. The XLF financial ETF was also higher, trading at a four-year high.

But tech was negative, with the S&P tech sector down 0.4 percent. Declines inFacebook and Apple weighed on the Nasdaq. Cisco, which reports earnings Wednesday afternoon, was also lower.

Gina Martin Adams, institutional equity strategist at Wells Fargo Securities, said the market would benefit if tech starts to participate, but she doesn't see signs of it yet. The S&P tech sector is up 2.8 percent for the year to date, trailing the market leaders – energy, health care and financials – all more than 8 percent higher in the same period. "It would absolutely help. Does it need to? We had a six percent gain in stocks this year with tech lagging. It doesn't need to, but it would be tough for the market to overcome a tech decline," Adams said.

Adams said she's been watching the Nasdaq 100, and it too is trailing. "We've had plenty of times in the past where tech hasn't led the market. I do think it's interesting Nasdaq is the only index not making new highs. Every other index is confirming the rise in large cap stocks, except for big cap tech. It's not confirming. Is it a divergence to worry about? Maybe, but it might be a little too early to say. It's worrisome if tech starts falling out of bed. Tech is typically a pretty strong leadership sector. It's an early cyclical. It tends to send leadership signals."

(Read More: This May Be Threshold of Bull Market: Lloyd Blankfein)

She said tech is not signaling an improving economy, or that it is ready to move higher. Some analysts, who expect the economy to do better in the second half, like tech and expect it to start moving up, as companies ramp up capital spending.

"I think what's happening in tech is an earnings story, and it's sort of deflationary," she said. "So I think that tech can be worrisome for the broader market, but I'm more worried about tech for techs, rather than a signal for the broader market right now. The fundamental case for tech has deteriorated, just cyclically over the last several months, and it has not shown any forward looking positive signals yet."

Adams said only semiconductors show signs of bottoming, and it is not clear yet whether that is actually happening or it's a temporary bounce. The Philadelphia semiconductor index SOX is up 11 percent since the beginning of the year, but the sector's performance has been mixed. For instance, Intel is up less than three percent year-to-date, and AMD is up more than 15 percent.

"Within tech, I'm basically worried about everything else," she said. "The worst component within tech is computers and peripherals. It's been held up a little by this news about Dell." Dell founder Michael Dell plans to take his company private with private equity partners for more than $24 billion, but some big investors oppose the deal and say it undervalues the company.

(Read More: Dell: Buyout Deal in Best Interest of Shareholders)

Apple is also a problem for the sector. "It's been a brutal decline. …It's such a huge tech stock in the big cap index. It's weighted so heavily toward that stock still. Until that at least bottoms, it's going to be tough for tech to perform," Adams said.

Adams said she's actually more concerned that Europe could become a problem again for the market, and many investors are complacent about it and have written it off as a concern.

She is also worried that some longer term technical signals are negative. For instance, the market only sees rising volume in sell offs, rather than in rallies.

"I've been advising against the uptrend for a while. I've been wrong but I'm not changing my mind," she said. "It's been on a fairly weak foundation. My modeling tells me the price is moving on a recovery in optimism and a lot of hope, but not a lot of real data to hang your hat on."

She said the market could be stuck in a sideways pattern until it finds a new catalyst.

Merger activity could be one positive support for the market this year, she said, pointing to Comcast's agreement to buy the balance of NBC Universal from General Electric for $16.7 billion. The stocks of GE and Comcast, parent of CNBC, both rose in after-hours trading after the announcement Tuesday.

What to Watch

Traders will be focused on President Obama's State of the Union, and how it could affect markets.

Wednesday morning's data includes retail sales and import prices, at 8:30 a.m. ET, and business inventories, released at 10 a.m. There is a 10-year note auction at 1 p.m.

The Senate Finance Committee considers Jack Lew to be Secretary of the Treasury, starting at 10 a.m.

The House Budget Committee holds a 10 a.m. hearing on the Congressional Budget Office's budget and economic outlook.

Earnings are expected from Dr. Pepper Snapple, Duke Energy, Lorillard, Hyatt Hotels, Thomson Reuters, Dean Foods, Calpine and Talisman Energy, before the market open. Besides Cisco, after the bell reports are expected from Applied Materials, Whole Foods, EOG Resources, Rovi, Zillow, Morningstar, TripAdvisor, Liberty Global, Pioneer National, NetApp, Kinross, and MetLife.

Microsoft, EMC, Visa and Texas Instruments present at the Goldman Sachs Technology Conference.

St. Louis Fed President James Bullard speaks at 11:10 a.m. on the economy and monetary policy at Arkansas State University.

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.