Cannabis Sector FOMO Takes A Hard Left Turn In Early Trade

Benjamin A. Smith

The cannabis sector took a hard left turn in early trade today, as recent Fear Of Missing Out (FOMO) flows went in reverse at the open. Unfortunately for some investors, the rather substantial gap down likely trapped a significant cadre of long-side FOMO money at inopportune prices.

We warned about this scenario transpiring after the market close on Friday. While we didn’t necessarily believe a substantial correction was on the horizon for Monday, we believe that on-balance, the cannabis sector could see more red than green this week. How the market reacts during it’s first true “crisis” moment over the past two weeks should set the tone for the rest of the week.

Currently, the Horizons Marijuana Life Sciences Index ETF (HMMJ) is only lower by ↓5.38%, which is really just in minor correction territory considering the huge run up in cannabis sector pricing. At this juncture, it’s unclear whether this initial thrust lower is a precursor to a deeper correction, or another buy-the-dip opportunity. The case can be made for both scenarios, depending on where your biases stand.

The bear case for more protracted selling is rather compelling. There’s a plethora of FOMO money trapped at elevated prices, which should act as a wet blanket for investor de-risking if prices start approaching former highs. As we mentioned last Friday, the market is heading into the September long weekend—traditionally one of the slowest periods in the stock market as traders foray into Muskoka country or the Hamptons. If slower trading activity does ensue, the bid should see the brunt of pressure as a lack of material news generally makes for bearish, grind-down price action in the cannabis sector. As bloody as the gap-down has been, prices as still very frothy at this time.

Also keep in mind that Tilray Inc. reports earnings after the bell today. While earnings have played a rather negligible part in overall cannabis sector pricing to date, negative revenue optics have the potential to roil the markets further if the headline numbers fail to inspire. To date, no quarterly financials are available for public consumption of SEDAR.

On the flip side, euphoric sentiment remains pervasive in the marketplace. Confirmation that Diageo Plc is entering the marketplace has ignited a fire under perceived likely suitors, such as Aphria Inc. And CannTrust Holdings Inc. That buzz isn’t going away. Should it happen sooner rather than later—assuming the deal is transformative in nature— a new wave of market euphoria could be unleashed at the drop of a hat.

Midas Letter will continue monitoring the cannabis sector trade winds as further evidence unfolds.

Company Last Change % Change Volume
MYM Nutraceuticals Inc 1.36 -0.12 -8.11% 598,118
CannTrust Holdings Inc. 9.31 -0.78 -7.73% 569,481
Cronos Group Inc. 11.12 -0.92 -7.64% 18,647,455
Canopy Growth Corporation 42.86 -3.46 -7.47% 9,011,001
Auxly Cannabis Group Inc. 1.12 -0.08 -6.67% 2,472,976
Emerald Health Therapeutics Inc. 4.17 -0.29 -6.50% 698,669
Aurora Cannabis Inc. 8.65 -0.6 -6.49% 11,007,652
The Hydropothecary Corporation 5 -0.34 -6.02% 1,878,796
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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