Ted Ohashi's Marijuana Stock Market Review & Outlook
As we said last week, the Let’s Toke Business Marijuana Composite Index was due for a week on the upside and it delivered. The Composite Index posted a gain of 1.3% after six consecutive weeks of price declines. There were a number of indications that a positive week was overdue including: gains in the LTB Licensed Producer Index and the 3Ci last week. However, we doubt that the summer doldrums are over as this was not a broadly based advance. Momentum lagged and the LPs and the 3Ci had sub-standard weeks. So last week may prove to be a rose among thorns.
The LTB Marijuana Momentum Index added another small sign of improvement. Momentum was totally neutral last week with the number of gains exactly equalling the number of losses. We interpret this to mean it is too soon to break out the horns and confetti. We may have one more positive week but we continue to look for summer to end before the dullness in cannabis stocks does. Legalization has been a bumpy process in the individual U.S. states and we suspect it will be in Canada as well. So continue to sit tight for the time being and enjoy the weather.
The LTB Licensed Producer Composite Index joined the party but posted a less than average gain of 0.7% for the holiday shortened week. Canopy Growth (NYSE: CGC) (TSX: WEED) was a feature last week closing at $37.00 per share, up 7.6% on the week. We look for the Licensed Producers to lead the way higher when the time comes and the overall lackadaisical performance last week contributes to our view that the overall cannabis market is still not ready to start a major advance.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp., posted a gain of 0.8% last week. In the past few weeks, the normal pattern of greater volatility in this index has been absent. The index constituents most closely match the LTB Licensed Producer Index and the similarity is evident. Again the moderate underperformance in this index last week contributes to our conclusion that cannabis stocks are not ready to move consistently higher.
The LTB Low-Priced Index had a comparatively strong week as we had been expecting. The Index recorded a gain of 4.3% in the latest period. Again, the lack of momentum in the Low-Priced group adds to our belief that the cannabis stocks still have a few more quiet weeks ahead. In fact, the index was able to post a strong advance in prices on average despite momentum recording a slightly negative reading. We have no reason to expect the more speculative cannabis stocks to move out of sync with the rest of the market so we don’t anticipate anything special on the upside for the time being.
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: as we said, we anticipated a bounce up in prices but also that it would likely be a short one. So the week ahead may post another small gain but we don’t look for anything spectacular until post-Labour Day. So don’t be frustrated. The markets may remain stubborn for a few weeks but we expect better times ahead as legalization day approaches.