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MDM - Switches to Neutral 1/20/11

Given the disappointment in leading cloud stock FFIV after the close due mostly to a shortfall in revenue projections going forward, a first in many quarters for FFIV, other cloud stocks look to be following FFIV's gap down before today's open in premarket trading. This is not just abnormal behavior. This is almost unprecedented where a leading stock shows little to no signs of distribution, then gaps down. The above average volume on 1/18/11 was not entirely problematic as FFIV has had big volume down days just prior to gapping up on earnings such as on 7/21/10 and 10/21/09. Then on 1/19/11, it sold off along with the weak market, but then finished about midbar of its trading range. Notice in the figure below showing 15 minute price bars, the last four bars in the figure just before earnings were reported showed strong buying coming into the stock, indicating a possibility that FFIV will beat earnings yet again for a seventh time.

Thus, given the negative tone of one very important part of the market, namely a prominent part of the technology sector, it is best to take the small profits and run for cover. Futures are about flat (-0.02%) as of this writing, so we recommend moving to cash.


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