The cannabis sector has been stuck in a bear market for the last few months. But now – the sector is flashing some early signs that the sell off could be over and the sector is ready for a rebound and new rally.
The Alternative Harvest ETF (NYSE: MJ) – a cannabis fund of north American cannabis stocks, gained +6% this week. It was one of the best weeks the fund has seen in the last three months. Take a look below.
Many of our favorite cannabis stocks and sector leaders were up even more.
- Organigram Holdings (OGI, OGI): +16%
- Canopy Growth Corp (WEE, CGC) gained +14%
- Cresco Labs (CL, CRLBF): +11%
- Aurora Cannabis (ACB, ACB) +9%
I see three reasons why cannabis stocks rallied this week.
Cannabis Sector was the Most Oversold it Has Ever Been: After the sell off this summer the cannabis sector was the most oversold it has ever been. This is a very big deal. A lot of investors that had been wanting to get into the sector are using the pullback to jump in. Long-term investors are using the dip to add more shares.
Shorts are Closing their Trades: Cannabis is one of the most shorted sectors in the stock market. Short sellers have been hammering cannabis stocks for the last few months, driving shares lower with a wave of selling. Shorts just saw a big move to the down side – they have scooped up some nice gains. Now, it’s time to take some profit. That requires shorts to buy shares back, driving the price of shares higher. I am expecting to see more short covering and I expect it to keep a bid in shares.
Seasonal Effect: Cannabis stocks have a history of being weak in the summer, and then rallying big in the fall and the end of the year. We’ve seen this happen in two of the last three years. With the sector being so oversold right now, we have a really nice setup for another big, year-end rally.
What Should We Expect Moving Forward?
I think this is the beginning of a reversal and new rally. I am expecting cannabis stocks to find a long-term bottom in this area and begin a new rally higher – and finish 2019 on a strong note.
We have three powerful catalysts directly on the horizon.
Canada 2.0 in October: Canada legalizes cannabis extracts in October and sales are expected to kick off in the fourth quarter. Even though Canada went legal in 2018, extracts are still illegal. Anyone who knows anything about weed knows that extracts are freaking huge. Cannabis oils and vape pens is the fastest growing segment of the cannabis market. Legalizing extracts is expected to almost double the size of Canada’s cannabis market. This be a strong tail wind for Canadian cannabis stocks for the rest of the year.
The Cannabis Friendly STATES Act: Cannabis companies are currently banned from banking services. Its a huge drag on the industry. The STATES act would change that – allowing cannabis companies to bank at places like JP Morgan and Bank of America. This bill has a lot of support – there’s a good chance it gets passed this year. If it does – I would expect it to give cannabis stocks a major jolt.
More US States Going Legal: The wave of legalization in the US is accelerating. Illinois goes legal on January 1. New York and New Jersey, two of the largest cannabis markets in the world, almost legalized this year and are expected to close the deal in 2020. Ohio is about to pass a ballet initiative for 2019. Arizona and Florida are expecting ballet initiatives in 2020 – I see both states going full legal by the end of 2020.
What is the Next Mega Event? The US Going Legal
The next mega cannabis event that we need to be preparing for is the US going legal – or passing some legislation that officially defers to the states on cannabis
This is going to happen a lot sooner than most people realize. I expect any movement toward this goal to trigger huge gains in cannabis stocks.
But its really important to understand how to invest. The time to invest in cannabis stocks isn’t a few months before any federal cannabis legislation. The time is right now – 12 to 36 months before it potentially happens.
Investing early, way ahead of the crowd is where the biggest gains happen.
This is exactly what we saw in Canada.
Canada went legal in 2018. The investors who scored the biggest gains – bought Canadian cannabis stocks in 2014, 2015, 2016 and even 2017. Those early investors were rewarded with enormous gains because they were investing way ahead of the curve.
I see this exact same cycle repeating itself in the US in the next few years. I expect the US to go legal within the next few years, and I believe the investors buying now, way early in the game are going to see the biggest gains.
And even if we don’t see federal movement on cannabis, the US cannabis industry is expected to explode in the next five years. Leading market-research firm Nielson is predicting annual US cannabis sales will grow 500% in the next six years. Take a look below.
*Image from Nielson
Moving forward I will be sharing more on the US going legal and how to play it – but for now I want everyone to start thinking about it.
The Big Picture and How to Play the Trend
After a tough bear market, cannabis stocks are showing signs of strength. I am expecting more gains as we move into the end of the year because of three short-term catalysts.
I still think the Canadian cannabis stocks will do great. But right now the biggest opportunity I see is US cannabis stocks. This the place to be adding shares.
I Already Own Cannabis Stocks: Sit tight with current holding and think about adding shares of US cannabis stocks.
I don’t Own Cannabis Stocks: Call me or email me.
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading. Michael Vodicka owns shares of Canopy Growth Corp (WEED), Aurora Cannabis (ACB), Organigram (OGI), Cresco Labs (CRLBF) at the time of writing.