Ted Ohashi's Marijuana Stock Market Review & Outlook
The Let’s Toke Business Marijuana Composite Index seems to be pointing toward a bear market. Last week the index shed another 3% and from the 2018 high, the index is down 33%. I follow several cannabis stock indexes and they are all in a similar position. Of course the other factor to consider is tax loss selling. (see Question of the Week below) This sets up well with the fact I mentioned recently: since 1940 the stock market has never declined in a post midterm election year as administrations try to ensure they will have a strong economy going into the next election two years away. So one possible outlook is for the cannabis stocks to remain weak until just after Xmas and then jump on a bullish bandwagon off those lows heading into the 2019 post midterm year.
The LTB Marijuana Stock Momentum Index continues to confirm the downtrend in prices. There is an adage that comes to mind: don’t fight the tape. The ticker tape doesn’t exist any longer but trends and momentum do. So a portfolio strategy should focus on caution as we have been advising for many weeks. And as we say below, if you’re going to trigger some losses, do it early. Don’t procrastinate. As you review your portfolio looking for tax loss selling candidates are the stocks trading at or near their 2018 lows. Stocks at or near their yearly highs aren’t susceptible.
The LTB Licensed Producer Composite Index seems to have joined the crowd instead of leading the pack. Last week, the LPs declined 1.8% which was a little better than average but enough of a decline to be noteworthy. At this point in time, it is only prudent to ensure you remain focussed on the financially stronger companies. In The Cannabis Report Model Portfolio, for example, three of the seven stocks are LPs (Canopy, Organigram and The Green Organic Dutchman). When you add in the cash position, 45% of the portfolio has exposure to the “bluer chip” cannabis stocks.
This chart shows the North American Marijuana Index (NAMI) published by MJIC. It is a price index comprised of thirty-four Canadian and U.S. stocks that are rebalanced to equal weighting every quarter. The Let’s Toke Business Index is comprised of both Canadian and U.S. stocks but is much more heavily weighted toward the Canadian cannabis stocks. The NAMI gives us an accurate reading of the group of stocks we cover. It can also be used to follow the markets inter-day. The NAMI declined 3.7% last week and is down 7.5% in the year to date. This is now our go to external index.
The LTB Low-Priced Composite resumed its deflationary ways posting a decline 4.1% last week. All of the major Let’s Toke Business indexes are now in well-established downtrends. At least this index is giving us a reading consistent with a negative psychology necessary to push cannabis stock prices down to these levels. Of course, we use this as a contrarian indicator so the lower it goes, the more bullish it is for the cannabis group. Again this is generally consistent with the view that after tax loss selling season that ends on December 27th this year, we could see the start of a prolonged recovery.
Conclusion: Our general message remains unchanged. Use caution with respect to the cannabis group for now. However, at least I can see light at the end of the tunnel. As it now stands, I can see the cannabis group remaining flat to lower as tax loss selling pushes the price of losing cannabis stocks down. This should end between Christmas and New Year and I can see prices moving higher from there.