Ted Ohashi's Marijuana Stock Market Review & Outlook
The cannabis stocks decided to take a rest last week with the Let’s Toke Business Marijuana Composite giving up 1.3%. As the chart shows, this is an interesting level at which the index might pause because there is potential resistance at around the 1,000 level. Unless the index rises above this point, it will not establish a new uptrend that is defined as a trend with higher highs and higher lows. Of course it can settle back a bit and make a higher low before heading higher. Remember this point when we look at the LTB Licensed Producer Index below.
The LTB Marijuana Stock Momentum Index is behaving normally. When breadth follows prices, this is expected behaviour. When momentum is most helpful is when it diverges from the price trend. In other words, those times when price indexes are rising but momentum lags behind or when prices are falling and momentum runs against the tide. For example, from the end of March to the middle of June, the price indexes held flat while momentum ebbed. This was a clear sign that prices weren’t ready to turn and one major reason we didn’t think prices would turn right away.
The LTB Licensed Producer Composite Index continued to demonstrate leadership posting a gain of 2.1%. In the one-year chart to the left we can see the difference resulting from the superior performance and leadership by the larger cap companies. This group has already made a higher high suggesting this group is now in an uptrend. The chart to the right shows the long term performance of the LP group. We can see that this group has generally traded in this pattern with a strong burst followed by a period of mild consolidation followed by another strong leap to higher highs. We anticipate this pattern to persist in the months ahead.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp., recorded another strong week with a gain of +7.8%. The reason one index can generate a result that is quite out of line with the other popular indexes is the difference in what it measures. We have referred to the 3Ci as the Dow Jones of cannabis stocks and it measures the performance of 15 of the largest companies in the cannabis group. The number has dropped in the past few months as companies like CanniMed and MedReleaf have been absorbed by Aurora. But the message from the 3Ci is still valuable as it tells us there is a very narrow group of cannabis companies that are performing exceptionally well.
The LTB Low-Priced Composite Index reflects the price performance of the smaller, more speculative cannabis stocks. This group faces the same challenge as the broader list measured by the LTB Marijuana Composite Index. As the line on the chart to the left shows, this group appears to be turning down without having reached a higher high. As with the Composite Index, it isn’t too late. As the chart shows these stocks can move sharply higher in a comparatively short period of time as it did in in November and December of last year. As long as the Composite and Licensed Producer Indexes continue to move into higher territory, the Low-Priced group will be carried along.
Conclusion: We are now only 40 days or so from legalization of cannabis in Canada. This will be headline news nationally and internationally. We will see pictures of people lined up outside of dispensaries just we did when gold prices were hitting new highs. But our readers know we don’t invest for the next forty days. So let’s keep looking ahead into 2019 and 2020 to see where we should be investing our money today.