Ted Ohashi's Marijuana Stock Market Review & Outlook
Last week the Let’s Toke Business Marijuana Composite Index posted a decline of 57.8 points or 5.9%. This was the worst one day decline since February 2, 2018 when the index lost 151.7 points or 12.2%. Although there was little market euphoria associated with legalization day in Canada, it might have been investors dumping cannabis stocks on a “sell on history” theory. We conclude that the market needs another “event” to drive prices higher. But given the weakness in the other indicators listed below, we believe that short of another major development, cannabis stock prices are likely to remain weak. We think there is a good chance that positive news might be forthcoming in the next 60 to 90 days. But we also see some potential clouds on the horizon. (see Marijuana Matters below).
On troubling factor is the continued weakness in the LTB Marijuana Stock Momentum Index. As we mentioned in LTB October 12, 2018, the momentum index was threatened a breakdown and if weakness persisted for four to six weeks, it would be troublesome. Well the momentum index has broken down in two weeks since then it is a cloud on the horizon. As we have said many times here, if prices and momentum diverge, follow momentum. This index is warning us to be cautious at this time.
The LTB Licensed Producer Composite Index (above) recorded a loss of 8.5% last week. This was a substantial underperformance relative to the LTB Composite. As regular readers know, we look on leadership from this senior group of stocks as a positive. The chart to the right plots the LP Index relative to the Composite. If the graph rises to the right, it means the stocks of the larger, better funded Licensed Producers are outperforming. If this changes we would view that as negative.
The Canadian Cannabis Composite Index, published by Davis and Associates Capital Corp. posted a loss of 18.9% last week. Except for a small uptick on Thursday, the trend in the index was progressively lower all week. This index is comprised of a smaller number of the larger cannabis companies and has a history of greater volatility. Even after the loss last week, the 3Ci is up almost 15% in the year to date.
To round out the indicators that were out of step last week, the Low-Priced Composite Index posted a loss of just 1.9% which was better than either the Composite or Licensed Producer groups. As we alerted readers last week, this index could fall below it’s one year low and now it has. This means that short of a new “event,” this subset could lead the cannabis group much lower.
Conclusion: when cannabis stocks reached a high point late in 2017 and early in 2018, we issued a series of reports pointing out our expectation of increased volatility in the cannabis group and the prudence of building and maintaining a cash position. For example, in The Cannabis Report Model Portfolio by Ted Ohashi, the portfolio has maintained a cash position of 20% to 30% over the past couple of months. This performs a defensive function in declining markets and provides the flexibility to take advantage of lower prices.
There are a couple of positive “events” that could help propel the cannabis stocks higher. For example, the U.S. midterm elections could produce a shift in the balance of power to the Democrats on November 6, 2018. Failing that, President Trump is said to be considering revamping U.S. federal policy on cannabis. Then, of course, there is always the possibility of another Constellation/Canopy deal.
But on the negative side of the coin, the Federal Conservative (anti-cannabis) party just moved ahead of the Liberal (pro-cannabis) party in Canada in a political poll. Also with the amounts of money and number of acquisitions being made in the industry, I am concerned that the potential exists for a scandal to percolate to the surface.
My main message is there are risks out there in cannabis investing. The days of picking the low hanging fruit are over. Now you need to be cautious and follow the professional advice of your investment advisor. Even in the greatest of new start-up industries, stocks have been volatile and particularly less experienced investors have run into trouble.