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Halftime: Tech’s Cloud Burst, Warning Sign?

Wednesday, 6 Oct 2010 | 1:25 PM ET

Both the Dow and S&P pared early gains on Wednesday with investors taking profits after a sharp move higher just one day ago.

However the Fast Money desk was more concerned by the negative action in the Nasdaq, which was led lower by cloud computing stocks after Equinix lowered its full year revenue outlook.

Equinix as well as its rivals have seen an incredible run up over the past few months on the cloud computing craze and on Wednesday Rackspace , Savvis , and Terremark were just a handful of the many names punished by tech investors.

Is the price action a warning sign of what's to come?

Instant Insights with the Fast Money traders

Investors were spooked after Equinix said churn was higher than expected and discounting was sharper than expected, explains CNBC’s Herb Greenberg. That’s what dragged down the entire space.

In other words, prices are being driven down and there's only so much these firms can do to compete for business, adds host Melissa Lee.

I have no opinion of where valuations in cloud stocks should be, adds veteran trader Gary Kaminsky. But the catalyst here was the bidding war that erupted for 3PAR. Investors who go into these stocks looking for the next takeover are typically late to the party.

I love these names and continue to love these names but I suspect we'll see valuations that were in the clouds come back to earth, adds Pete Najarian. I agree with Gary that investors were building in a sharp takeover premium and now realize they may not get it.

Fast Money Midday Market Check
The Fast Money traders discuss the day's top stories and share their midday trading advice.

If you're going to play the space you've got to learn about it, adds Jared Levy of Peak 6. Some are data hosting and some are data storage. Not all companies are created equal. Personally, I like Google and CRM, he adds. I’d play CRM by selling the October 95-85 put spread, which is a bullish bet.

What many people don’t know is that one of the big leaders in this space is Amazon , adds Steve Cortes. For me the play is long Amazon.

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DOW 11,000 WATCH

Investors are keeping a close eye on 11,000 in the Dow , wondering if the blue chip index can break above this key psychological level.

Although the latest data from ADP showed showed private employers cut 39,000 jobs in September, investors took it as a sign that the Fed may be that much closer to implementing QE2.

What’s the trade?

In the short term you’ve got to realize that the tape is being impacted by portfolio managers chasing performance, explains Gary Kaminksy. That will likely go on through December. But that’s about relative performance. It not about ‘let’s buy because we have strong conviction.’

Also keep in mind we’re adding a lot of hot air in the market with the weak dollar, says Steve Cortes. It can be profitable in the short term but it could be setting us up for a fall.

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ISN’T THAT PRECIOUS - GOLD & SILVER

Gold touched $1350 and silver again hit 30-year highs as the dollar index fells to its lowest level since January.

What’s the trade?

I’m still seeing option investors make bullish bets in this space, says Pete Najarian. Call buying in the GDX and the GLD suggest to me that investors anticipate more upside in the gold trade.


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Trader disclosure: On Oct. 6, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Pete Najarian is long (AKAM) calls; Pete Najarian is long (DD) stock; Pete Najarian is long (WFC) put spread; Pete Najarian is long (BP) call spread; Pete Najarian is long (GDXJ) stock; Pete Najarian is long (ABX) call spread; Jared Levy is long (SPX); Jared Levy is short (GLD); Steve Cortes is short (XLF); Steve Cortes is short (BAC); Steve Cortes is short Mex. Peso; Steve Cortes is short Euro; Steve Cortes is short (BIDU); Steve Cortes is short corn; Steve Cortes is long German bonds

CNBC.com with wires.

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