Updated: Jun 20, 2018
Readers may have noticed that for the past few weeks we have not featured our Momentum Indexes. The reason is we noticed an increasing discrepancy between the data that was being entered and the results the indicator was providing. So we undertook a detailed analysis of what was going on.
Going back to the beginning, in January 3, 2014 when the momentum index was first calculated, there were fewer that two dozen public “cannabis” companies trading and several of those were failed mining companies that discovered they could raise money by simply saying they were considering entering the marijuana business. In looking back, one could make the case this was never their intention.
Some of these companies were wolves in sheep’s clothing. At that time, it was virtually impossible for a small company to raise money for resource exploration. But in 2013, investors had gone wild over the thought of investing in marijuana. So the company would make its comment in a brief press release of sorts, they would raise a small amount of money at around $.05 or $.10 per share and use that money to fund a little bit of exploration and a lot of mining company executive’s extravagant lifestyles.
This made it virtually impossible to create a momentum index that provided a satisfactory picture of what was going on with respect to the cannabis stocks. As a result, we experimented and came up with a weighting system that provided a reasonable picture without the distortions of wildly fluctuating prices and companies entering and leaving the industry with great regularity.
Over the past 41⁄2 years, the number of cannabis companies has increased sharply and investor sophistication has risen just as quickly. As this happened our formula became outmoded. And is often the case, it was like watching a plant grow. Each week there wasn’t much difference between to the result but over time there was quite a difference.
It was clearly time to update our index. We found the most appropriate momentum calculation to apply to the cannabis stocks was the more traditional and conventional one, that is, unweighted. So that is what we have done and we compare the results below.
As the comparison over the previous twelve months shows, the “old” index to the left showed a much sharper advance in the rally in prices last fall but did not show as great a decline as prices have since then. We also sensed that given the data we were entering each week, the flat trend in momentum we saw recently was not reflecting the base data that went into the chart. Therefore, we were not comfortable drawing conclusions from our momentum calculations.
As the longer term chart illustrates, the first two years were quite similar. There was a general decline in momentum. After that there was a flat period. But since late 2017, there has been a significant divergence.
The unweighted calculation shows momentum during the rally in the fourth quarter of 2017 was more subdued on an unweighted basis and the decline since then has been much sharper.
Moving forward we will publish the new, unweighted version of the index. We will continue to calculate the former index and keep an eye on it. Hopefully the new momentum index will give us a better indication of what lies in store with prices.