Cannabis Bottom or Cannabis ‘Head-Fake’?

Cannabis Bottom or Cannabis ‘Head-Fake’?
Cannabis Bottom or Cannabis ‘Head-Fake’?

Cannabis investors have seen something this week that they haven’t been seeing for many months: cannabis stocks broadly rising on good news.

What we have been seeing in 2019 is this: cannabis stocks falling on good news. Or, with extremely strong news, we would see a stock have a one-day bump – and then watch “the Market” immediately claw back those gains.

Perhaps the most extreme example of this suspicious market behavior came recently with Aleafia Health (CAN:ALEF / US:ALEAF / GER:ARAH).

On November 11th, Aleafia announced its first outdoor harvest: 10,300 kilograms of dried flower at a cash cost of CAD$0.08 per gram. It’s a potential game-changer for the Canadian cannabis industry. Its stock leaped 30% on the news.

The next day, Aleafia reported its first profitable quarter. And “the Market” immediately clawed back the entire gain.

Then we have this week’s entirely different market behavior with respect to cannabis stocks.



Curaleaf Holdings (CAN:CURA / US:CURLF), the U.S. cannabis industry leader, reported a strong quarter (but not a profitable one) after market close on November 19th. Its stock jumped roughly 15% the following day, then followed through with another strong gain in the next session.

Canopy Growth (US:CGC / CAN:WEED), Canada’s industry leader, jumped by 15% on news of a “buy” recommendation from Bank of America Merrill Lynch. Then it followed through with an even larger gain the following day.

Previously in 2019, markets have completely shrugged off analyst’s “buy” ratings and positive reports.

Yet not only did Canopy Growth leap higher for two days on the strength of one buy-recommendation, there was a mild sympathy rally among many of the larger Canadian companies.

This sparked the following reaction from a veteran trader.



Has the cannabis sector finally put in a bottom, after relentlessly grinding lower for the past 10 months – to greater-than-two-year lows? Or, is this “a head-fake higher before tax-loss fueled selling”?

The Seed Investor offered investors this advice on tax-loss selling the day before the big jump that we’ve seen in the share prices of many cannabis stocks this week.
 
Obviously, market dynamics are much, much weaker today. But industry fundamentals are much, much stronger (especially in Canada).

Because of this, many prudent investors may choose to adopt a hybrid strategy with respect to investing in cannabis stocks.

They will add to their favorite companies now, so that the train doesn’t leave the station without them. But they will “keep some powder dry” as we move into the beginning of 2020.  [emphasis mine]

Part of the reason why cannabis investors may need to add to their holdings now comes in the observation that prefaced the conclusion above.
 
This begs the question: should cannabis bulls hold off on taking advantage of extremely low valuations (now) in the hope they will go still lower?

There are still six weeks to go in 2019. During the last six weeks of 2017, the entire sector doubled.

The spike in 2018 started in the second half of summer. The last spike in cannabis stocks started (literally) the first trading day after Christmas.



Even during the last 2+ years of falling cannabis valuations, we’ve seen extremely sharp spikes. When cannabis stocks start to broadly move higher, they really move higher.

Can cannabis investors who have endured the previous slide afford to wait until 2020 before averaging down with existing cannabis holdings or adding new ones?

Indeed, will this week’s rallying in cannabis stocks cause many cannabis investors to re-think some of the tax-loss selling they had planned?

What’s more painful than enduring (effectively) a two-year slide in some of your investments? Liquidating those investments at the bottom – and then watching them immediately leap higher.

Should cannabis investors be buying now?
Should cannabis investors be engaging in tax-loss selling now?

One week ago, most investors would have answered “no” to the first question and “yes” to the second.

But after this week…???