Ted Ohashi's Marijuana Stock Market Review & Outlook
When they talk about summer stock markets on Wall Street, traders say “some’re up and some’re down.” As we have been warning, 2018 for the cannabis stocks seems to be one of the down markets. Last week the Let’s Toke Business Marijuana Composite Index declined a further 0.5% to reduce the positive return for the year to date to +5.9%. Last week we talked about a “dead cat bounce” and the LTB Index looks like it’s ready for one because the weekly drop in this index was relatively modest, the 3Ci Index actually rose modestly last week, the LTB Licensed Producer Index rose and the Index has fallen for six consecutive weeks.
The LTB Marijuana Momentum Index added a second small sign of improvement. Momentum did not improve last week but for the second time in succession, the downside momentum eased. This is not enough to put momentum in the positive camp but it does suggest that behind the scenes, advancing stocks are gaining strength while declining stocks are losing momentum. So if the price indexes were to improve for a few weeks, it would not require a major change in momentum but rather a continuation of the improvement that has already been taking place.
The recent tendency of the LTB Licensed Producer Composite Index to perform well in comparison with the overall Composite Index continued again in the most recent week. The index was able to post a small +0.3% gain and the two stocks we mentioned last week, Canopy Growth (NYSE: CGC) (TSX: WEED) closed at $33.85, up $0.30 for the week and Organigram (TSXV: OGI) closed at $5.08, up $0.58 per share. Both stocks have been trending higher since mid-July. Again, we are seeing leadership from the better quality stocks which augurs well for the time being.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp., posted a gain of 0.7% last week. The index mimicked a pattern that has been noticeable of late, that is, the gains came early in the week and slowly gave it back in subsequent trading. Again, this is a positive sign although it makes sense in light of recent trading. The 3Ci recorded a sharper decline in the first half of July. For example, between July 6th and July 20th, this index lost -16.4%. So the improvement since has been a gradual recovery in the higher quality stocks in this index.
The LTB Low-Priced Index had a relatively poor week posting a loss of -1.7%. The loss was not exceptional for this index which usually reflects the greater volatility of its low priced components. However the index has given back almost all of the gains made in the major rally between late October 2017 and early January 2018. This bears watching because the technical picture will deteriorate significantly if the index breaks through the 12-month low of 147.78 set back on October 20, 2017. Technically, this low should represent a support level and the index should reverse before penetration this point.
Finally, let’s take a quick look at this chart which measures the average length of declines in the LTB Marijuana Composite Index which currently stands at six weeks. As can be seen, there were only three instances in which corrections lasted longer. This means almost 95% of corrections have ended by this point. Readers will recall that we don’t follow any of our indexes blindly. In spring and summer of 2017 as the index put together a streak of 12 down weeks in a row, we continued to call for the decline to continue. This time we see other forces at work to suggest we will have a bounce in prices, probably a short one, starting soon.
Conclusion: although we continue to look for the summer to be dull and down, there is room for a short lived rally heading into the fall. We see this as an opportunity to nibble at some laggards or stocks that have dropped back in price in the past six weeks. On our list, there is Khiron Life Sciences (TSXV: KHRN), Lexaria Bioscience (OTCQX: LXRP) (CSE: LXX), (Radient Technologies (TSXV: RTI) and Sunniva (CSE: SNN).