Ted Ohashi's Marijuana Stock Market Review & Outlook
Updated: Jul 31, 2018
As expected, it looks like we are in for a long, hot and lower summer for the cannabis stocks. The Let’s Toke Business Marijuana Composite declined 1.4% last week. The technical picture remains negative although the index could be setting up for a dead cat bounce. This is an upturn that is not likely to persist as in “even a dead cat will bounce if it falls from high enough.” But short of that it looks like the month of August leading up to Labour Day will be dull-ish and down-ish. Just the same we urge cannabis shareholders to maintain their holdings as better times lie ahead in our view.
The LTB Marijuana Momentum Index showed the smallest sign of life last week. In the previous week four stocks declined in price for every one that advanced while last week there were only two stocks on the downside for everyone that rose in price. So there was a very slight improvement in momentum but not enough to change our outlook. As the chart above shows, momentum overall is still very negative and it will take several weeks of improvement to impact that change.
Although it many not be evident from the chart above, the LTB Licensed Producer Composite Index has been performing well in comparison with the overall Composite Index. To the right we show the long term performance and it is clear the LPs have been outperforming the consistently over the past two years and overall since the index was first calculated over four years ago. That is why we have always recommended between two and four LPs for every portfolio. At present, our picks are Canopy Growth (NYSE: CGC) (TSX: WEED) and Organigram (TSXV: OGI).
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp., demonstrated its greater volatility again last week recording a decline of 5.9%. After a strong bounce on Monday, the index fell into a swoon for the next four days. In the past two weeks, the 3Ci has given back 18.3%. We have reported regularly that increased volatility will be a characteristic of the cannabis markets moving forward and that remains an important part of our expectation. We believe cannabis stocks are heading to an aggressive buy point but we think that is still at least a month away.
As we did with the Licensed Producer Indexes above, we show the one-year LTB Low-Priced Index to the left and the longer-term chart below. We expect before this cannabis stock market cycle ends, there will be a strong rally in the micro and nano-cap sector. Here we note that as with the LP stocks, the Low-Priced group has been declining (left) but outperforming (right). When the cannabis group begins to recover, we believe this sector will lead the parade.
Conclusion: no substantial change in our outlook for the group. Volatility and a bias to the downside until the summer is over. We have used Labour Day as our line in the sand but that could change depending on how the wind blows.