Cannabis Sector Down 34% from 52-Week High: Buy or Run?

If you love a great deal now is the time to be looking at cannabis stocks because the sector just went on sale.

The cannabis sector has fallen into a bear market. In the last two weeks, the North American cannabis index has fallen sharply, dropping 34%.

I See Two Reasons the Cannabis Sector Is Under Pressure

#1 – Weakness in Global Stocks Is Weighing on the Cannabis Sector

The global stock market has taken a beating in October.

The S&P 500 is having its worst month since November of 2008. The leading index is down more than 10% from its 52-week high in the last four weeks.

Here are some more stats that show how tough October has been.

  • The Dow is down 7% in October, its worst monthly decline since May of 2010.
  • The NASDAQ’s 12% decline would be its largest one-month drop since October 2008.
  • The small-capitalization Russell 2000 index is down 12% In October – that would be its worst month since 2008.

As you can see the global stock market is having a very tough October. Trillions in capital have left the market. These capital outflows have had a big impact on the highly speculative cannabis sector.

When risk capital flows out of the broader stock market, it doesn’t exit “safe” stocks like utilities and dividends. It exits speculative sectors like cannabis.

This broad stock market weakness in the number one factor that has been weighing on the cannabis sector.

#2 – Short-Term Profit Taking After Cannabis Sector Spiked in August and September

The cannabis sector was on fire in August and September. The North American cannabis index jumped more than 50% in four weeks. Canopy jumped more than 100%.

After the cannabis sector didn’t spike on October 17 when Canada went legal, a lot of short-term traders decided it was time to cash in some gains.

Here’s the Good News: These are Short-Term Problems

This recent blast of weakness is a speed bump – it’s not a roadblock. The cannabis industry is not broken or doomed. In fact, the outlook has never looked better.

In the short run, I expect a quick rebound. In the long run, I still expect the cannabis sector to close 2018 at an all-time high.

Cannabis sector most oversold in two years: After this selloff, the cannabis sector is the most oversold it has been in two years. Every time the cannabis sector has been this oversold it has triggered enormous rallies.

For example, the last time Canopy was this oversold was May of 2017 – directly before shares went on a rampage and jumped from around $7 to above $40.

Four US states voting on cannabis in midterms: Four more US states are voting on cannabis laws next week for the midterm elections. I expect good news, and that should be good for industry sale and investor sentiment.

US stocks moving into the strongest period of the year: The six months from November to May are the best six months of the year for the S&P 500. November, December and January are the strongest three months of the year.

Some of this new capital flowing into the broader stock market should find its way into cannabis and give the sector a nice boost into the end of the year.

Early Canadian cannabis sales are coming in far ahead of expectations: Canada became the first developed country to legalize cannabis on October 17. Early sales have been blowing past expectations.

More Edmonton cannabis stores face supply shortages; demand ‘way more than anticipated’

This is important because it looks like Canada’s cannabis market is going to be significantly bigger than expected. Recent estimates projected Canadian cannabis sale could be between $4 to $5 billion annually. Today it looks like annual sales could be twice that, more like between $8 and $10 billion.

US and Mexico looking to legalize medical cannabis in 2019: It looks like the US and Mexico want to follow Canada’s lead on cannabis.

There is a high probability the US will pass federal legislation to legalize medical cannabis in 2019 – while also officially deferring to the states on recreational cannabis.

Here are some more details from the Washington Post.

President Trump plans to pursue federally legalizing medical marijuana following next month’s midterm races, Rep. Dana Rohrabacher, California Republican, said Thursday.

The Trump administration has made a “solid commitment” to reform marijuana laws, and the president has spoken in support of federally legalizing the plant for medical purposes, Mr. Rohrabacher told Fox Business Channel.

“I have been talking to people inside the White House who know and inside the president’s entourage,” Mr. Rohrabacher said, Fox Business reported. “I have talked to them at length. I have been reassured that the president intends on keeping his campaign promise.

Mexico is also signaling a strong desire to legalize medical cannabis.

Mexico’s president-elect, Andrés Manuel López Obrador, is looking to take bold action to end Mexico’s bloody drug war – and there is a high probability that will include legalizing cannabis.

Mexico’s new president is plotting to end the militarized drug war

The US and Mexico joining Canada in legalizing medical cannabis on the federal level would instantly transform North America into a global cannabis powerhouse.

This should provide a huge jolt to the industry and cannabis stocks.

The Cannabis Sector is Still Looking Great – Use Weakness as a Chance to be Aggressive

As you can see, the outlook in the cannabis industry is better than ever. I view this recent wave of weakness as transitory. The long-term trend is still extremely bullish. I view weakness in the sector as a great opportunity.

Michael Vodicka
Editor, Cannabis Stock Trades

About the Author & Cannabis Stock Trades

Michael Vodicka is a globally syndicated equity analyst with more than 20 years of experience in trading and investing. His research has been featured in some of the industry’s most respected publications.

He has been investing and leading investors in the cannabis sector since 2013.

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Michael Vodicka owns shares and call options on Canopy Growth Corp at time of writing.