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  • Writer's pictureTed Ohashi

Is the cannabis market due for a correction?

QUESTION: A commonly repeated prediction is October 17th will be a "sell on the news" event. I also frequently read that high expectations for Canadian cannabis legalization will end in disappointment, as the rollout in the provinces will be slow and high margin products like edibles and oils will not be legal right away, resulting in lower revenues. Finally, it is stated (ad nauseum) that the cannabis market is a bubble and due for a major correction. Do you think this may be a time to at least partially divest in cannabis stocks, or would that be a mistake, given that this is the moment we've all been waiting for?

From JR in San Francisco

ANSWER: A very timely question as by the time we publish our next edition, cannabis will be legal in Canada. That doesn’t make the question any easier to answer.

Sometimes, when an event is well known for several months in advance it becomes old news before it becomes good news. That could be the case with legalization day in Canada. Investors were piling into the cannabis stocks ten months ago in the expectation of recreational cannabis being approved. Since then it has been one delay after another as JR notes. It just goes to show that government politics can ruin anything. Even a cannabis dry dream.

I suspect that legalization day will mark the change in focus of investors away from Canada toward international markets. But just because it may not be a memorable day for investors, let’s not forget the contribution of all those who worked tirelessly to make it happen. I’m talking about those who were advocates when it posed severe legal risks. When it wasn’t supported by 7 out of 10 Canadians. When they did it because they had a vision and believed.

As far as reducing exposure in portfolios goes, please read or follow ‘The Cannabis Report Model Portfolio.’ In it, I have consistently maintained a cash position of 20% to 30%. This is because I think we are in the trading phase of the market cycle. This is a time of high volatility during which cash protects you when prices are declining and allows you to take advantage of opportunities when they arise. The time to buy as much cannabis stock as you can afford and hold on for dear life has long passed.

We love to get your questions. Please keep them coming. Tell us what’s on your mind.

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