NEW YORK (CNN/Money) - Those who held onto their tech stocks for dear life as selling reached a crescendo in late July can breathe a sigh of relief: Despite some bumps Friday, the Nasdaq is up some 18 percent since it hit an intra-day low of 1,192 on July 24. Some leading tech names like AOL, Cisco and Nokia are up more than 30 percent .

Nervous investors naturally wonder if this rally can last. It's a reasonable worry. With apologies to Ian Dury and the Blockheads (responsible the new-wave classic "Reasons to be Cheerful, Part 3"), here are some reasons to be careful.

Not to put too fine a point on it, but anyone who still thinks we're going to see a miraculous revival of tech spending in the second half of the year is living on Fantasy Island. While there were some slight improvements in demand in the first half of the year, a recent report from WR Hambrecht suggests that "the recovery in technology spending could follow a sluggish pace well into 2003."

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Companies are still sitting on their wallets, waiting for an improvement in their own profits before shelling out money for new technology. Many companies are still working through the excess software licenses they paid for in the boom years, and most businesses see no compelling reason to immediately upgrade their aging but still adequate PCs.

Meanwhile, consumer spending on electronics may have hit a wall -- as recent warnings from Best Buy and Radio Shack suggest.

Though tech valuations have fallen dramatically since this spring, some tech names still sport nosebleed valuations. Yahoo, for example, trades for nearly 60 times estimated 2003 earnings (and nearly 100 times estimated 2001 earnings); eBay trades for 55 times estimated 2003 earnings.

True, some tech bellwethers look almost reasonable. Intel, which a couple of months ago was looking pricey indeed, now trades for 23 times estimated 2003 earnings; Cisco trades for 27 times (July) 2003 earnings. (See "Is tech cheap yet?" for more examples.)

But the rest of the market is trading for a P/E below 20 -- does tech still deserve a premium?

And you have to wonder about the earnings those valuations are based on. Tech firms have tended to use pretty aggressive accounting -- heavy reliance on pro forma results and lots of one-time charges -- to make their numbers look better. (See "Merrill: The new earnings cops?" for more on tech's low quality earnings.)

And many big tech firms – including, of course, Intel and Cisco – are big users of options, which artificially inflate earnings by disguising the true cost of compensation. Expensing options would have cut profits by companies in the S&P 500 by a startling 22 percent last year, according to Standard & Poor's.

While many companies, including Coca-Cola, say they will start expensing options, most tech firms have no intention of doing so.

As we sail ever onward into the unknown, investors would do well to watch investor sentiment gauges. Indeed, during the past several months, sentiment indicators have been startlingly accurate contrary indicators. Investors were most scared in late July -- as I noted in this column at the time -- just before the Nasdaq began its rally.

So how are investors feeling today? Somewhere in between: the Chicago Board Options Exchange's Market Volatility Index, a widely followed gauge of investor nervousness, has fallen from its jittery July 24 peak of 57 (high scores suggest high degrees of bearishness) to a little above 30 -- still a long way from the complacent reading of 19 the index hit in late March. So what is that telling us? Mr. Market is feeling a little bit confident, a little bit cautious.

That sounds about right.

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