Canopy Growth Corp and Cronos Group Inc Helped Propel Cannabis Stocks 28% In Five Days—What Comes Next?

Benjamin A. Smith
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News surrounding Canopy Growth Corp. (TSE:WEED) (OTCMKTS:TWMJF) soon-to-be NASDAQ listing has provided a much-needed boost to Canadian cannabis stocks, and Cronos Group Inc. (CVE:CRON) (NASDAQ:CRON) is already there.. After a February swoon which saw equities lose a 1/5 of their value (as determined by the Canadian Marijuana Index [CMI]), stocks have catapulted to the upper-end of an important swing high. As such, we look at possible scenarios for the cannabis trade in the days ahead.

But before we dive into the technicals, let’s recap in two words why the market has rebounded so strongly: Canopy Growth.

The sector’s undisputed leader (world leader, for that matter) single-handedly put the sector on its back when it needed it most. On February 28—with cannabis stocks trading near 2-month lows (CMI)—Canopy Growth lead a ferocious gap-down reversal rally which hasn’t stopped since.

The catalyst for the rally appears to be a keynote speech Canopy Growth CEO Bruce Linton made at the Economic Club of Canada on March 1st. Linton’s declared that Canopy had looked into a possible NASDAQ listing last October, and suggested one may be forthcoming. Although no timetable was given, investors weren’t waiting around for the “Cronos effect” to slip away from their grasp.

Of course, we’re talking about the recent price action of Cronos Group Inc. (CVE:CRON) (NASDAQ:CRON), which has rallied over 41% since listing on NASDAQ on February 26. The out-performance is being driven by strong demand by American investors who have little in the way of investment-grade options down south.

Given that Canopy Growth is the undisputed sector leader in an unsaturated market, investors have piled-on. We can clearly gauge the rise in investor interest in Canopy’s volume profile, which has sprung to life after a moribund late-February.

So now that cannabis stocks are clearly overbought, where does the sector head next? I will attempt to make sense of technical picture as it currently stands.

 

Volatility Dies Down… For Now

The extreme volatility in cannabis stocks has been intense. It’s actually been the culmination of several factors bringing fear and greed into the market.

It really kicked off in late January, when the CBOE volatility complex soared and crushed various short stat/arb trading strategies in the process. With VIX derivatives unhinged, risk assets got clobbered and the cannabis sector was no different. In fact, the volatility squeeze was powerful enough to drag the S&P 500 into official correction mode—if only for a couple of days.

Next up was the general chatter that the cannabis sector was too expensive. Midas Letter CEO James West sounded the alarm numerous times on this point, as did other big news outlets. Narratives have a way to seeping into the collective conscious over time if they are believable enough. Quite simply, sector sentiment nosedived and buyers were shaken down by generalized ‘risk-off’ sentiment. The snake started eating its own tail.

Finally, mid-February news that cannabis sales would be delayed didn’t do investors any favors. While the delays didn’t seem too serious, it brought unforced uncertainty to the sector at the wrong time. Were more postponements around the corner? Would implementation be slower out of the gate than first anticipated? Suddenly, the market seemed fragile and defensive after being bulletproof for the balance of two years. Doubt has a way of exposing your greatest weaknesses.

With all those negative catalysts in the rear view mirror, the cannabis trade has turned. Weak hands have been flushed out and a new round of working capital has been deployed.

In terms of the charts, I don’t get too wrapped up in indicators. Not only are most of them lagging, many tend to conflict one another. But some key resistance areas are now in play, and how price interacts with them will provide important clues as to which way the market moves next. These are some generalized areas I’m looking at right now.

As you can see with the projection line, I expect the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) to consolidate in the short term. In a nutshell, I believe there’s too many lingering overhangs for the market to brake out—yet. Gathering clouds surrounding trade, generalized ‘risk-off’ mentality and continued questions about valuation can keep the market in-check.

However, this doesn’t mean the market will be contained forever. The above chart is just one intuitive trader’s view. As we get closer to legalization in early-spring, an unforeseen takeover here, or huge sector catalyst there could spring another new rally on a dime. It could happen at any time, irrespective of personal opinion. But there’s a flipside: prices could sink if those expected catalysts fail to arrive. It’s too hard to tell quite yet.

Until then, my trained eye is telling me the market is setting up for a period of consolidation. At least, for the next few weeks as investors works off the excesses from two extremes. We’ve come quite a long way from both directions.

We once again look to Canopy Growth’s performance as the straw that stirs the drink.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

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