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Charting Man Dan on the 2020 Election and Market Movers in the Cannabis Space

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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.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Charting Man Dan McDermitt, founding partner and analyst with the Chart Guys, discusses how the 2020 election will impact the economy. McDermitt indicates that the stock market would respond positively to a Trump re-election. In contrast, he believes a win by the Democrats would reign in sectors like biotech and banking. However, the Democrats will likely have a pro-marijuana platform that includes accelerated legalization, which would allow cannabis stocks to act as a hedge play. Charting Man Dan examines the recent acquisition of Newstrike Brands Ltd (CVE:HIP) (OTCMKTS:NWKRF) (FRA:0N8) by HEXO Corp (TSE:HEXO) (NYSE-A:HEXO) (FRA:74H) and notes that the deal was done without a premium. He indicates this is negative news for smaller companies looking for buyout deals. McDermitt offers technical analysis on large cap names in the space and highlights narrowing patterns, which suggest possible breakouts.

Transcript:

James West:   Charting Man Dan McDermott joins me now via Skype from Asheville, North Carolina, right, Dan?

Dan McDermott: That’s right, glad to be back!

James West:   Yeah, it’s great to have you back. Dan, so today our theme is, you know, the outlook for cannabis stocks and the economy generally in the context of the 2020 elections, and you had some interesting hypotheses – theses, we’ll call them. Why don’t we start with that?

Dan McDermott: Sure. So it’s bigger-picture, you know, we’re looking 20 months out, and I’m told that in the US it’s a much bigger deal. We look a lot further ahead in the election than you do in Canada, and that’s probably because there’s billions of dollars doing their best to purchase the outcomes. But what we’re going to be looking for is, we clearly see that the stock market is a fan of Trump and Republicans. It’s been going up since he was elected, in a very big way.

So we can assume that if Trump is re-elected, the market is going to be, you know, continue to do well, continue to hold on. And that would be important for the MJ sector because, you know, I’m always talking about correlations to the S&P 500 and how big of an impact that does have on the sector as a whole.

But we can also look at the other side of things and say that if a Democrat were to win, that would be negative for the overall market in my opinion, and we can anticipate things are going to go down due to a number of reasons. You know, we have Democrats talking about reining in the biotech sector, reining in the big banks, reining in Citizens United, which allows Big Money to have influence on politics. So if that were to happen, we would anticipate the markets would go down.

But we can make the assumption that if a Democrat were to be elected, they are very likely to have a very pro-marijuana legalization platform as well. So we can assume that while the markets will be going down in a reaction to a win, we would see the MJ market start to thrive again, anticipating that we would get accelerated steps toward legalization. So it’s almost like the marijuana sector could be a hedge play to go bullish in, as the market pulls back if there were a Democrat elected.

Now, way too soon to look at polls or anything like that, but this is just broader picture, something to start wrapping our heads around as we get ready for 2020.

James West:   Sure. So are you suggesting, then, that a Republican victory, while it will be good for a broader economy, would be less beneficial to the progress of cannabis de-prohibition in the US than would a Democrat win?

Dan McDermott: I would say so. I think it’s inevitable regardless; we’re just talking timelines, and I think a Democrat would probably be a faster timeline towards legalization, towards, you know, rescheduling, getting the banking sector involved, all of the key points that we need to see for the US MJ market to start to thrive. So it would be an accelerated version of what’s going to play out, if the Democrats were to pull out a victory.

James West:   Sure. Do you think the scope and scale of the cannabis market in 2020 would be sufficient to offset the broader economic downturn that would be engendered by a Democratic victory, as they seek to bring debt and spending under control?

Dan McDermott: Not big picture, not as far as a whole market is concerned; but if we’re talking individuals, you know, my parents are of the age of entering retirement, and so I’m constantly wondering, you know, what are people that have retirement accounts going to be doing? And if we were to see a Democrat victory, it would be bad timing in the sense that, you know, their investments would probably be taking a hit while they’re already retired, while they’re relying on that money.

But if they make that hedge play and go into the MJ space, in my opinion, it will make the blow to their account a little bit less severe.

James West:        Interesting. Okay, so one of the events in the cannabis space that I wanted to touch on is, we saw HEXO bought Newstrike. So that’s, HEXO was the larger company there, and Newstrike was the lesser company, but against normal traditions when that kind of thing happens, we saw that the acquiring company’s stock went up, as did the acquiree, which is contrary to the normal pattern of the acquiring company’s stock taking a hit in the short term until it actually ingests the smaller company.

Why do you think that the stock of HEXO rose on news of the takeover bid?

Dan McDermott: Well, I won’t take credit for John back there, but deal was done with no premium, and that’s significant, and usually you see a premium paid to the company, and that’s why, you know, people invest in these smaller companies hoping to get bought out. And this is a change from that norm, and it’s also a potential, maybe an omen for future companies, saying, wow, you know, we don’t have as much hype in the space; maybe those premiums are going to start shrinking a little bit, so maybe all these smaller companies, these smaller LPs that are looking for the potential of a buyout deal from a CGC or a bigger company, maybe they’re not going to get as good a deal.

So I think it has a bit of a ripple effect in terms of perhaps lowering expectations in terms of the premiums that smaller companies are going to receive in the near term future.

James West:   Okay. All right, Dan, so what are we looking at, here?

Dan McDermott: So we’ve got CGC, this is a five to six week long pattern, and it’s just a tightening range, and if we were going to visualize this, it would be something along the lines of a pendulum, where the swings are getting smaller and smaller each time, and we’re going to reach what I call, this is an equilibrium pattern, and we reach a flex point where we literally can’t get any tighter. And when that pattern reaches that flex point and we get a clear break, we see a volume spike – so next week, we’re anticipating this pattern is going to break. And people that draw trendlines – I’m not much of a trendline-drawer myself, but if we were to do it here, you could just see visually it’s a tightening range that’s going to be forming.

So like I said, we’re anticipating a break next week. Here we are, coming down towards the support here, and the key levels to be watching: 43.71 on CGC as a support level, and our new resistance level that’s key is 48.01. So we’re going to see this range continue to tighten into next week; we’re going to see a volume spike somewhere along the lines of, oh, let’s say, 12 million-plus shares traded. Right now our 20-day average is about 7 million shares traded.

So the volume spike tells us the break is occurring, and we’re going to be looking for this break to dictate pretty much where we’re headed for April in terms of momentum. So I do believe, obviously, because this is the sector leader, in my opinion, that it’s going to have a significant impact on all the names in the sector. There will be some names that can, you know, go against the grain and do their own thing, but at a broader sense, this break of this CGC pattern is going to be really important for, again, end of March into April.

James West:   Interesting. So the break that you’re speaking about, is this a sign that investors are getting sort of fatigued with the diminished performance potential as a result of this consolidation pattern, and that that’s going to cause some abandonment of the play?

Dan McDermott: One thing that we don’t do is, we don’t, you know, try and predict direction. So with these equilibrium patterns, they’re very common after a high volatility; so when we had this huge move back in January and February and we entered a new range, this is just price discovery; this is trying to find out, you know, where we stand, and so we’re not saying it’s going to be a bull break or a bear break, but we know a break is imminent. So if we get a bull break, we’re going to see shorts covered, and we’re going to see bulls pile on as we look to test the recent high of 51.81.

If we see a bear break, we’re going to see stop losses trigger, we’re going to see bears jump in, and there’s a lack of support down under 41.68, so we would potentially be looking to the upper $30 area as a target from there. So it really, it’s going to paint a completely different picture depending on which direction this break does occur.

James West:   Wow. So I guess absent a fundamental catalyst, is it more likely, in your opinion, that we’re going to see a break to the downside, whereas if we do see something that would be considered fundamentally significant, that the break might happen to the upside?

Dan McDermott: I would say that the break right now is favoured to the upside for a number of reasons. Number one, the trend, just in the sense of where we are coming from: we’re coming off of a bull move, and this is a tightening pattern from that bull move. And Number two, the S&P 500 has really impressed me in terms of the resiliency of these bulls over the past three months since the December crash. They’ve held up extremely well, and we’ve got oil holding up extremely well. So until I see weakness in the S&P 500 or in oil, I’m not going to anticipate significant weakness in the MJ sector.

James West:   Okay, do you have an S&P chart good to go, there?

Dan McDermott: Sure, we can pull it up. This is SPY, which is the ETF which tracks the S&P 500. Let’s clear up these lines. So just looking at the weekly time frame: again, the dump from December, we saw just a straight-up V-shaped recovery with no consolidation. We finally got the consolidation we were looking for, and it lasted all of pretty much one week, and just like that, the bulls are right back to the high of the bounce. So, holding on very strong, and at this point for me, we’re going to have to break the low of last week to see any kind of bearish momentum in this sector, or I should say in the markets as a whole.

So, 272.42 on SPY is a key level for me, and if we were to pull back into next week on SPY, back to the low 270s, that’s a scenario where I could foresee CGC breaking bearish. CRON is also at a pretty critical point in terms of coming up on a couple key supports: 19.50 and then down to 18.72, these are US numbers. But again, once these levels break, if they do break, there’s a lack of support immediately below those levels, just like there is on CGC. So bears could get a little bit of follow-through if it is indeed how it plays out.

James West:   Uh-huh. Looking at the large cap cannabis companies, it seems like they’re all sort of falling into this pattern, this equilibrium pattern after the big spike in the first quarter of 2019. And is that more or less indicative of the potential for another summer downward drift absent sector-wide catalysts?

Dan McDermott: Yeah, we’re definitely looking for that. Seasonality has been a big part of the MJ sector for quite some time; we’ve talked about it on your show here in the past. So it is, I mean, and it’s almost a self-fulfilling prophecy to a certain degree, where this is the narrative that we’re seeing in chat rooms and in social media groups that are concerned with the sector. Just, you know, people are expecting that perhaps ‘sell in May, go away’ is going to be occurring in the space. and for a lot of names, I mean, it wouldn’t be a significant red flag if we were to see consolidation.

Just looking at CRON, the run that we saw back at the end of the year, I mean, we could pull back into the upper teens and still be just fine on a longer term picture with how significantly we have run. I mean, just looking back, we ran to 15.30; we gave back 50 percent of that move, and then saw a continuation. So if you are truly long term and you’re looking out, you know, three, five years plus, then weekly consolidation and a bear break of these daily patterns wouldn’t really be a major concern at this point.

James West:   Wow, Dan, fascinating as per usual. I always learn so much when I’m talking to you. We’re going to leave it there for now; I’ll come back to you next week. Thanks so much for your input as usual.

Dan McDermott: Thanks, James. See you next time.

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.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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