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The backbone of all this technology we are using is breaking out

Key Points
  • Chip stocks are surging after strong earnings results from Intel and Samsung Electronics.
  • Using Kensho, a quantitative tool used by hedge funds, CNBC found the Technology Select Sector SPDR Fund and PowerShares QQQ Trust ETF outperformed the month following strong chip sector returns in the last decade.
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Chip stocks are surging, and it bodes well for the broader technology sector.

Samsung Electronics posted a record third-quarter profit Tuesday and gave a bullish outlook for 2018 due to strong demand for its memory chips, driving the semiconductor industry shares higher. Memory maker Micron's stock rose 6 percent following the report.

The VanEck Vectors Semiconductor ETF (SMH) is now up more than 8 percent this month, hitting a 17-year high and on pace for its best monthly performance since July 2016. The chip sector ETF is up 42 percent this year through midday Tuesday versus the S&P 500's 15 percent return.

PC industry stalwart Intel is up more than 19 percent this month, on pace for its best month since October 2003. The company's shares surged after it reported better-than-expected third-quarter earnings last week.

"Chips stocks are the probably the most influential group in technology and tech is the largest component of the S&P 500," LPL Financial senior market strategist Ryan Detrick wrote in an email. "We've seen chips continue to soar and as long as this group leads, it is a positive overall sign for the bull market."

Using Kensho, a quantitative tool used by hedge funds, CNBC searched for the performance of tech sector ETFs after the VanEck Vectors Semiconductor ETF rose by at least 5 percent over a month.

Since chips are an essential building block for almost all technology products, the relationship between chip stocks and technology shares returns is not a surprise.

The findings show the Technology Select Sector SPDR Fund and PowerShares QQQ Trust ETF rose roughly 1.4 percent on average the following month in the last decade after strong chip sector returns, according to Kensho.

Jefferies strategist Sean Darby also believes technology stocks are headed higher. He reiterated his "modestly bullish" rating on the sector Monday.

"One sector in the S&P 500 that tends to benefit the most from a 'Goldilocks' environment of a weak dollar, buoyant overseas demand, consumer and corporate spending is the technology sector," he wrote in a note to clients. "In turn, this is being reflected with some of the best forward sales and earnings revisions."

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.