Cloud Trade on Watch

Last week was brutal on F5 networks – FFIV – and its investors.  Just when you thought it was safe to play in the clouds, F5 proves that this sector is as volatile as it gets and you MUST limit exposure into earnings and be aware of the sector action on the whole.   Just because you may not have owned F5 doesn’t mean you were immune to the fallout.  This proves a point – know your stock and know your sector.  Even as a day trader, it’s good to know where the money is flowing. Your odds of making positive returns increases as you participate in sectors with strength.

Remember what happened to cloud stocks with EQIX collapsed back in October? They all tanked and the talking heads on CNBC decided that maybe cloud stocks are not the way to go.  It’s true that they are volatile and you have to be nimble, but I believe the future is generally bright for this sector. BTW – Since the EQIX fall, it’s up 21%

So, here we are – in the same boat – FFIV fell off a cliff and took some friends with it. Last week was ugly, but with every significant sell-off comes possible opportunities.  That opportunity is now.  If all of the pieces fall into place, FFIV is going to be a great trade this week.  Here’s why and my strategy.

The catalyst: VMware – VMW.

It all pivots around VMW.  Lat week’s move could very easily be recovered in many of the players in this sector if VMW reports good earnings.  NOTE: if you didn’t notice, VMW saw plenty of buyers Thursday and Friday.

The players: All of the following companies could see significant gains off a good report from VMW –  EQIX, EMC, CRM, AMZN, RAX, RVBD, FFIV, NTAP, APKT, N.  Of course, I favor FFIV after such a haircut.  Hell, this stock still has the backing of Jim Cramer and a lot of media attention.  See spreadsheet here of these stocks and their current trading statistics.

The move: VMW reports after the close on Monday (listen to conference call here).  That’s unfortunate.  I wish it was in the morning, but anyway.  Some of you might try to pick up FFIV or other clouds before VMW reports, but this is a very risky move.  If they don’t report strong numbers, then it will act to confirm the weakness seen in FFIV causing an even deeper decline.  So, I’m opting to wait to hear what VMW has to say and then I’ll pounce – possibly in after hours.  We must confirm a positive move in VMW first, however.  Also, there isn’t a need to go after FFIV, VMW should be a good trade, as well, if it reports.  But, my play will be FFIV since it’s further in the oversold range than most.  The ‘safer’ trade names are RAX, EMC, CRM, RVBD.

Good luck with this trade and I’ll see you in the Boom Factory after hours on Monday to watch the action.