Will cannabis stocks have a summer rally or summer valley?
Around fifteen months ago, February 13, 2018 to be exact, I published a report on Seeking Alpha titled “Where are we in the Cannabis Stock Market Cycle?” In that report, I outlined my model of a stock market cycle that is made up of two separate parts as shown in the illustration above. The first phase is the bull market which is a time when stock prices are generally rising. The second stage is the bear market which is an extended period of price declines.
The bull market is made up of two stages as shown in the illustration above. The first stage is the bull market dynamic phase which is an uptrend with very few significant corrections. The second stage is the trading phase of the bull market during which prices still rise but at a slower overall rate of gain with increased volatility. The bear market is a downtrend with few rallies of any size. Bear markets are shorter and typically do not give back all of the previous bull market gains.
The graph above identifies when I hypothesized we were moving from the dynamic phase to the trading phase of the bull market. The chart below shows the actual results with the Let’s Toke Business Marijuana Composite: more volatility but prices trending down and not up.
What does this mean? Well we could still have a summer rally instead of a summer valley that would put us back on track with the idea that a Liberal loss in October will trigger the third leg of the cycle – the bear market. But the stock market has an astonishing way of making great ideas look stupid (along with the people expressing the ideas). So the market could continue on its current path until around October and a Liberal loss in the election could become one of those “sell on history, buy on mystery” moments. In other words the Liberal loss is history; the market has already gone down; now it’s time to buy the mystery.
I still think we will see a separation in the performance of cannabis operators in the U.S. compared to those in Canada. I think the probabilities are extremely high that there will be some breakthrough in the U.S. in a bipartisan fashion favouring cannabis. I also think there is much smaller chance a desperate President Trump will make a bold move in favour of cannabis trying to sway some votes from people not already in his camp. So I think we should stick with the U.S. over Canada strategy we have been following.
Where does that leave us? If we are at “A” on the illustration above, as my thinking has been all along, it won’t be a long wait. At some point between now and the end of July we will have a rally in cannabis stocks that continues for four to six weeks. But if we’re closer to “B” the market will continue its current downturn until mid-October to complete the bear market leg of the cycle and an entirely new cycle will start thereafter. Although this is an unsatisfying state of affairs, for me to choose either “A” or “B” would simply be a guess. I think it is better to wait a few weeks to see what transpires.
Conclusion: although it may seem frustrating and unsatisfying, there are times in the stock market when the best strategy is to sit tight and let the market point you in the right direction. I think this is one of those times. Hopefully, within four to six weeks we will have a clearer path ahead. In the meantime, let’s wait and watch what happens.