Seller's fatigue in the cannabis investment market

At certain turning points in the market, there is a term called “investor fatigue” or sometimes “investor exhaustion.” It is used in the following ways. “Buyer’s fatigue or exhaustion” applies to an extended period of accumulation and higher prices that ends when buyers run out of gas and the market turns down. In other words, buyers have purchased all the stock they can buy and the sellers begin to take over. “Seller’s fatigue or exhaustion” is the opposite and occurs when seller have dominated the market and have dumped all the shares they want at prevailing levels and the buyers begin to dominate.

Given how strong and how long the decline in cannabis prices has gone, it is no surprise we are seeing some signs of seller’s fatigue which means the trend might reverse from down to up.

We have shown this chart quite frequently. It shows the number of consecutive weeks the LTB Marijuana Composite Index has gone up or down. The overall record of trading in public cannabis stocks is a short five and a half years. Still in this time, the current trend of 14 consecutive down weeks in the index sets the record for trading futility. This means is sellers have dominated for 14 straight weeks and may be getting tired. This defines seller’s fatigue to a tee.

Regular readers will also recognize the momentum index. Price indexes such as the Dow Jones Average and the Standard & Poor’s Toronto Stock Exchange Index measure changes in stock price and market value a.k.a. capitalization. This means larger companies and higher priced stocks are more dominant in the index. In a momentum index, each stock is one component of the index regardless of size or stock price and all that matters is if the stock went up or down in price. This momentum chart shows that sellers have been dominant for at least a year. Again, this is a good indication of potential seller’s exhaustion.

Here are two Canadian cannabis stock price indexes for the previous twelve months. I have chosen to show a couple of indexes because price indexes are normally calculated differently. As is evident, even though the index movements are not exactly alike, they are similar. Both charts illustrate that over the previous year, sellers have been more dominant, in other words, the general direction in prices has been down. Again, this is another prelude to seller’s fatigue. Using the less volatile LTB Marijuana index, buyers have been dominant in around 15 weeks out of the past year while sellers have held sway for 37 weeks. This means sellers have held the upper hand two weeks for every one week the buyers ruled.

The most important qualitative signs that a rally is a response to seller’s fatigue are the following. First, individual stocks seem to rise without reason or are pulled up by the general advance in other stocks. This market has been dominated by the CannTrust Scandal that has carried stocks lower and the Aphria “profit” report that has carried stocks higher. The difference between the two is the Aphria situation indicates there are cannabis stock buyers out there just waiting for a reason to buy. Another sign we are close to a seller’s fatigue rally is as the decline has continued, individual stocks have ignored good news. Companies have been reported news that would ordinarily drive stocks higher but the decline has been relentless. If the stock markets move higher, we will see that individual stocks respond to good news.

Another consideration is one reason the momentum index is in a general downturn is because many of the “junior” cannabis stocks aren’t going to survive. Some of the declines that show up in the momentum index are permanent. If you have had any experience with the junior resource stocks, you will know from time to time there have been significant discoveries that spawn scores and perhaps hundreds of wannabees. Companies that acquire a piece of moose pasture somewhere within 50 or 100 miles of the main discovery, “on trend.” When the dust all settles a year or two later, there are probably less than a handful of companies survive while the others become empty shells to be resurrected in the next play. This is going to happen with the cannabis stocks. Many of the names that people bought into during the excitement of the cannabis bull market will become worthless investments that might be the shells when the next up-cycle starts and people are looking to do Reverse Takeovers.

If a rally develops at this stage it will likely be fuelled by seller’s fatigue. This will tend to make it more of a bear market rally that may still be worthwhile. But to push the trend into the next bull market, a blockbuster development such as a voter swing toward the Liberals in Canada or a major positive move toward legalization on the part of President Trump in the U.S. will be needed. Short of this, rallies in bear markets tend to be shorter and less robust. It will be an opportunity, perhaps a last chance to get rid of any non-survivors that remain in your portfolio. Make sure your holdings are concentrated in companies that have survivability.