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Tickers in this Article: AAPL, SKYY, QQQ, AMZN, ORCL, RAX, CRM
Cloud computing has often been called the next big thing in the technology world and that's saying something for a sector that is long on revolutionary and game-changing products. Cloud computing is expected to be big business in the coming years and it's already big business right now. In late 2011, CompTIA, the non-profit trade association for the IT industry, said cloud computing was generating significant revenue streams for IT firms. "Among IT channel companies offering cloud computing solutions, 46 percent report deriving 50 percent or more of their annual revenue from cloud-related products and services in the last 12 months, according to the CompTIA survey. The large majority of these companies (85 percent) expect cloud sales to grow in the next 12 months," CompTIA said in a statement.

For a little while, that was good news for the First Trust ISE Cloud Computing Index Fund (NASDAQ: SKYY), the lone ETF devoted solely to the cloud computing business. Following a rocky debut in July 2011, SKYY rebounded and was found flirting with $22 as recently as early April.

Unfortunately, SKYY fell victim to some dark clouds and did so rather quickly. In the past month, the ETF has plunged almost 7% compared to a 3.4% loss for the PowerShares QQQ (NASDAQ: QQQ), the Nasdaq 100 tracking ETF.

SKYY is home to plenty of Nasdaq 100 constituents, including Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN) and Oracle (NASDAQ: ORCL), but even those mega-cap names have come under intense selling pressure in recent weeks.

SKYY has also fallen victim to weak earnings reports from some of its more pure-play cloud holdings. In the past week alone, Rackspace (NYSE: RAX), SKYY's fourth largest holding is off 11% after the high P/E stock reported results that disappointed Wall Street. Now Salesforce.com (NYSE: CRM), one of the original and largest cloud firms, is expected to do the same when it reports results next week.

Analysts expect Salesforce, SKYY's fifth-largest holding, to report earnings of 34 cents a share, up 22% from a year ago, on revenue growth of 34% to $678 million, but the stock plunged 9.1% on Thursday on speculation corporate and government customers aren't spending as much on cloud services as high valuation stocks such as Rackspace and Salesforce need them to.

The average price/earnings ratio for SKYY's constituents is 24.2. For an ETF that's high and in the case of SKYY, that number is being suppressed somewhat do to low-multiple stocks such as Oracle and Apple. Still, that leaves SKYY vulnerable to earnings misses from its higher multiple constituents and the ETF has already proven itself to be more vulnerable more diverse tech funds such as QQQ.

In a tepid economy and a volatile market environment, SKYY may only be worth a look if it tests its 200-day moving average and finds support there.

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