Will the Cannabis stock market grow out of its seasonal patterns

Question: Cannabis stocks seem to rise between September and February/March each year over the last few years and then drift down over the summer. Do you see this happening going forward as the industry matures?

MP from Manchester, UK

Answer: Over the years, I have come across several “seasonal” patterns in the stock market. Below I have listed some of them. There are many others as well.

1. The Santa Claus Rally (also known as the yearend rally). This is the tendency of the stock market to rise around Christmas and the yearend holiday season. The Stock Trader’s Almanac founded by Yale Hirsch says that between 1950 and 2017, the S&P 500 Index rose 74.2% in December while the Dow Jones Industrial Average advanced in 70% of the last months of the year.

2. Sell in May and Go Away. This is an old saw based on the belief that stocks perform better from November to April than from May to October. Mark Hulbert, best known for this Hulbert Rating says since 1897 it has only been true in the third year of a Presidency when the market averages a gain of 11% compared with a small loss in the summer. In other years, the results are not significant.

3. The Summer Rally: This is an axiom that suggests the stock market rises in the summer months. It should be clear that the idea of a seasonal ‘summer rally’ conflicts with the notion of ‘sell in May and go away.’ For this reason, seasonal investors cover all the bases in case the summer rally doesn’t materialize. In those years they talk about the ‘summer valley.’

4. The Boston Snow Index: There is absolutely no correlation I know of between the stock market and the amount of snow in Boston. The reason I like this one is the abbreviated name, The BS Index. This is a closer reflection of what I actually think of most of these.

When we consider seasonality in the trading of cannabis stocks, there are a few points worth making:

• The stock market seasonal patterns are based on more than a few years of history. The Santa Claus Rally has almost 70 years of historical analysis and there are many more years if you want it. The Sell in May and Go Away idea has been measured back almost 120 years. So it is probably a little early to be drawing conclusions about seasonality in the cannabis stocks with only four or five years of data.

• Even if you notice a pattern with such large amounts of history to look back on, these indicators don’t really work all that well. It seems for every summer rally we have, there is an equal and opposite summer valley the following year. Most academic studies have shown if you take into account trading costs and normal market risk, there is no profit in seasonal trading.

• For an index to be of use, there must be a logical reason to explain it. If you follow interest rates, for example, rising interest rates make fixed income investments comparatively more attractive than stocks and higher borrowing costs have a dampening effect on the economy which also hurts stock performance. Falling interest rates have the opposite effect. But how can you explain a summer rally?

• Some indicators may have been justified at one time but not today. For example, the Sell in May indicator is sometimes linked to the practice of bankers and brokers hundreds of years ago to leave the summer heat in the City of London in favour of the cooler countryside.

• In the brief history of cannabis stocks, price trends in the last two years were impacted significantly by Constellation Brands and Canopy Growth that I’ll refer to as CBCG. It happened CBCG1 occurred in late October of 2017 and CBCG2 took place in August this year. This contributed to the pattern you ask about. But those were financial transactions that could have happened at any time of year.

Well you asked me what time it is and I’ve told you how to build a clock. I hope you’ve gathered that I don’t place much value in seasonal trading patterns. A good example is in early August I had the opportunity to start a model cannabis portfolio for The Cannabis Report. It was the middle of summer and the cannabis stocks were falling fast and furious. My personal expectation was that the cannabis stocks would stay quiet until after Labour Day. But I called on my experience and decided to start it right away – on August 10th. Over the years I have advised people that the best time to start investing is when you can. So I simply took my own advice and it worked out for the best. So I doubt there will be much of a seasonal pattern to the cannabis stocks.