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Stock prices surge now, but will drop soon

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Joshua M. Brown / The Reformed Broker

(Read caption) Stock prices have been high on the eve of earnings season, but when Equinix (purple line) reported that their earnings were just 2.2 percent lower than expected, their stock price dropped 30 percent overnight. As other earnings reports come in, expect further drops.

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For the seventh straight quarter, stocks raced higher into earnings season, which for 3rd quarter, officially kicks off tomorrow with the Alcoa ($AA) report. Today's action in the cloud computing names does not bode well for companies with shortfalls to announce.

Equinix ($EQIX), a cloud hosting data center company, missed revenue by 2.2% and is currently getting schmeissed to the tune of 30% on the day!

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Had the company beaten by 2.2%, I doubt we'd be looking at a 30% rally. The term for this type of action is Asymmetrical Risk. Even a stop loss can't protect you when a stock gaps down 28 points before the market even opens. You're getting executed wherever, Pancho.

EQIX was one of the momentum leaders in the cloud group, along with Citrix ($CTXS), Rackspace ($RAX) and VMWare ($VMW). Going into their earnings report last night, the stock was trading at 90 times trailing earnings and 41 times next year's. The tightrope act you're faced with at that kind of multiple is such that the company cannot even afford to hiccup.

With 88% of stocks trading above their 50 day moving average, I would say it's highly likely that we'll be witnessing other public executions this fall.

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