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Marijuana Stock Analysts Are Missing This One Thing

With marijuana stocks tanking of late, the sector appears to now be controlled by short sellers and day traders. Emotional investors taken to panicked selling appear to have left pot stocks to lie in wait for larger institutions to stabilize the market, most likely sometime after legalization settles into Canada sometime later this year. Analysts and the expert class, technical or otherwise profess the vision of Heimdall in determining a catalyst for the downtrodden cannabis stock market but offer nothing more than the short-sighted vision of Loki.

Industry insiders erroneously stoke the panic of a cannabis stock bubble from the inside of one. Yet, there is something these analysts are missing about marijuana stocks.

Technical analysts in the sector would have cannabis stock investors roll solely with the tides of Canopy Growth Corporation (TSX:WEED) while populists fret daily over the steep decline of the once mighty Aphria Inc. (TSX:APH). An all-consuming weed stocks bubble has emerged, not to be burst, but rather in which to hide.

“With Canopy Growth giving way, the impetus to stay invested in cannabis stocks evaporated—at least for now,” wrote Benjamin A. Smith in James West’s Midas Letter of a sector-wide retreat on April 3. “Canopy had been the one counterbalance saving the sector from a greater rout these past few weeks. The stock had displayed persistent relative strength in a sea of price degradation everywhere else. While there were a handful of exceptions—CannaRoyalty (CSE:CRZ) springs to mind—the ongoing weakness has ensnared most everyone in the dragnet.”

And although West’s rag prefers shorter-term technical outlook in lieu of broad-based analysis for the benefit of swing traders and the long-term crowd, words matter, as does the proverbial forest over the trees.

Health care and gold prices brought down the S&P/TSX Composite Index by 32 points on Tuesday, April 3, a broad system shock that affected not just the marijuana markets alone. A coincidence in isolation, the dip is part of a trend affecting both marijuana stocks and the broader markets. As BNN reported earlier this year, the benchmark Index lost nearly six percent in the first quarter, placing 77th out of 93 global financial peers.

As marijuana stocks trend downwards, market analysts and cannabis evangelists alike continue to ignore the basic connections to the broader markets at large.

Recently, a piece in Forbes by the self-titled Cannabis Capitalist Alan Brochstein, whose real insight comes at the cost of $600 per year, threw every reason for the market downturn at the wall, looking for something to stick, while paying lip service to the broader market trends. To be fair, it was a fairly comprehensive essay that made the hard to argue diagnosis of death by a thousand cuts (although an argument for unfair packaging guidelines feels weak on the surface —Dennis Leary’s old take cigarettes, paint them black, put a skull and crossbones on them and call them tumors and people will still line up around the block bit comes to mind).

“Following the decline in prices, financial media has been very negative on the sector,” wrote Brochstein. “Last week's cover story from Barron's discussed a pending supply glut and very high valuations. Several anonymous contributors at Seeking Alpha have shared very negative views on the largest companies in the sector as well.”

Barron’s article, which appeared on March 30 made headlines across the sector, but, arguably, did little to sway weed stocks. What did occur, however, was an easy to follow pattern of marijuana stocks rising and falling in unison with Wall Street on the days prior to and following the release of Barron’s piece.

Smith and Brochstein and the larger cabal of marijuana stock analysts are not incorrect in their assessments. Everything from delayed legalization in Canada to a market correction following last year’s price run-ups has turned pot stocks volatile. “FOMO” investors invaded the market —castaways from the cryptocurrency blow-up —and allowed chaos free rein. “Several factors have contributed to the recent decline, most of which are specific to the sector,” wrote Brochstein in Forbes.

While several may be specific to the sector, the most obvious factor —the simplest factor that analyst after analyst ignores is not. Marijuana stocks are following, for the most part, broader market trends on a long-term basis. All one need really do is lay the charts next to each other.

The TSX and The Nasdaq
 
The Marijuana Index

Bulls and bears and short sellers and day traders are all a fickle bunch and marijuana stocks too exciting to pass up and too new for most to understand. It is easy enough to create a bubble ready to burst when too much time is spent in one. Analysts and experts understand the marijuana stock market, they know why it is going down, but they are missing the most important thing; the obvious thing. Pot stocks don’t live in a vacuum.

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