Canopy Growth, Cannabis Sector Consolidation Begins—A Look Ahead

Benjamin A. Smith

Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) has undergone a very powerful run. But often, pinpointing the consolidation phase in expansive bull markets can be a difficult affair. Sideways moves frequently rest for a day or two, before marching ever higher. But at this juncture of the three-and-a-half week exhaustive bull run, I think there’s enough evidence to safely say the market has begun a consolidation impulse which will see prices constrained for the balance of the week ahead—and perhaps even longer.

Before pontificating on the various observational and price action anecdotes at hand, a little context is in order. The cannabis market, obviously, has had a very large bullish extension. The Horizons Marijuana Life Sciences Index ETF (HMMJ) is higher by ↑55.65% since August 14th; sector leaders Canopy GrowthTilray Inc., and Aphria Inc. have surged ↑110.69%,↑324.54%, and ↑133.60% respectively. Mid-majors like Hexo Corp. and OrganiGram Holdings Inc. have shattered all-time highs.

The small caps—not considered among the names courted by Big Alcohol/Pharma—have participated in the recent insanity. Namaste Technologies Inc. had doubled in eleven sessions, before a vicious end-of-day selloff took hold on-close. FSD Pharma Inc. has gained an incredible ↑384.61% since August 20th, despite a dearth of material news. Valens Groworks Corp. sprinted up ↑126.92% in nine session on a couple of LOIs and some Board changes. Dozens of smaller LPs have surged to various degrees for no other reason than money was seeking to front-run any cannabis junior which had not yet participated. That particular trade has been one of the surest predictors of short/medium term tops so far in 2018.

Like any rally, it eventually becomes a casualty of its own success. Naturally, investors begin balking at paying nosebleed premiums, and the market drivers responsible for the indiscriminate enthusiasm become discounted by the market. If no alternate transcendent news supplants the old, FOMO goes into reverse, as investors focus on preserving profits rather than potentiating gains. This is where I believe the cannabis market is at right now.

Shifting to the charts, a couple of things in particular catch our eye.

For the first time since the Constellation Brands Inc. deal was announced on August 15th, Canopy Growth has made a discernible lower high within its channel band. Not only does this provide a stiff area of resistance to work through as latecomers pare positions into strength, it provides a potential springboard for short sellers (retail & institutional) to start aggressively selling. Whether bulls are stout enough to prevent too much damage remains to be seen, but there’s a good bet the low 60’s (46’s on CGC) will be tested. A daily hold of the September 4th gap-up highs—should it get there—will be convincing evidence that further price extension is in the cards. If bears can’t even break the $63.75-$64.00 area by midweek, they’re in a heap of trouble.

Co-sector driver Tilray Inc. is also experiencing the same lower-high setup for the first time since August 15th. Today’s volume also dropped ↓56.31% from Wednesday’s peak, when prices topped out at $97.34/share. This type of pronounced volume bleed highly suggests the consolidation has begun.

Another aspect suggesting market pause are the way certain high flyers behaved on-close today. In particular Hexo, Namaste Technologies and Aphria—among the sector’s strongest individual names this week—tumbled hard going into the close. It’s apparent spec investors bidding up those names felt uncomfortable taking large positions into the weekend, and chose to pare risk/book profits in a convincing way to make that happen. While this isn’t absolute proof that widespread de-risking will predominate next week, these type of 10-percent program-type sells don’t typically happen when the market is rocking higher.

We saw a similar dynamic play out with OrganiGram on August 10th, preceding a nasty 2-day tumble to open the week on Monday. Of course, that occurred in bear market conditions, and sentiment is much more sanguine on this occasion. Still, the bulls were finally pushed around today after weeks of purchasing everything in their path. With the consolidation just beginning, there’s little reason to believe we won’t see more of that type of tussle early next week.

Final Thoughts

Unless we see the downward volume trend reverse—buoyed by a transcendent Big Alcohol/Pharma deal (or imminent reports of one) boosting the sector—consolidation is likely to occur next week. That much is a given. The real question is how far bears can move the chains, because it’s highly likely they are going to make a somewhat aggressive run of it.

Canopy Growth holding the $61/share area ($46.50, CGC) should be a good proxy for the continued strength of this bull run. Tilray holding $69’s should also be monitored, in my view. Either way, the breather should give market participants ample opportunity to profit-take and position themselves accordingly for legalization which arrives in five weeks.

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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