The theory of rational markets maintains that stock prices at any moment in perfectly reflect every bit of information available to investors. Whoever came up with that theory needs to do a reality check. What about all those scoundrels who trade on inside information?
Personally, I believe much of the day to day price changes are news driven. Maybe a better term would be news rationalization. Traders check the news early before the stock market opens. That determines their strategy for the day. Meanwhile, in places like CNBC start pulling out news stories that fit the same theme. One side feeds on the other. It’s called mob psychology.
Digging into January
All this raises the question: what drove January’s spectacular cannabis price performance? Was it the result of lots of good news. Or as some would contend, nothing more than a short squeeze? Let’s start with news announcements from the biggest winners
Here is where things are really fascinating. It is hard to find much truly new information during the month. Take Canopy Growth (CGC) for example. It was the best performing stock gaining 89 percent. The big news on Canopy is its $4 billion deal with Constellation Brands (STZ), but that is hardly news having been struck months ago.
And then there is the super $2.9 billion deal between Cronos (CRON) and Altria (MO). With a 78 percent appreciation, CRON was the second top cannabis stock last month. But realistically, the deal with Altria was announced back in December so the news could hardly be responsible for the spectacular performance.
Elsewhere there was plenty of news about cannabis from the new farm bill passage to Aurora’s outsized $132 offer for Whistler. So it would be unfair to say there wasn’t a liberal dose of encouragement for cannabis investors. But why did those five stocks experience such awesome performance?
Market skeptics believe the performance can be attributable to a short squeeze. This occurs when traders holding a short position in a stock like Canopy. Faced with a sudden unexpected rise in stock prices, panic ensues and rush to cover their position.
What that means, of course, is that January’s price action was a mirage. One the short cover is over; cannabis stock prices will tumble due to the absence of buyers. This is not such a dumb idea. After all, 44 percent appreciation was recorded in just the 20 trading of January. That smells very much like a short squeeze.
Confounding the skeptics
Data shows any notion of a short squeeze is pretty far fetched. For a squeeze to take place, the first requirement is a big short position. The 50 most heavily shorted stocks on the Nasdaq offer a benchmark. They have between 28 percent and 66 percent short interest relative to their average trading volume. How does this compare with cannabis companies?
Let’s start with the biggest star of January, Canopy Growth. Over the last two months, the short position has never been more than 16 percent. It ranged between a low of 7 percent in mid-December reaching it high on January 19 and closing out the month at 12 percent.
Moving on the Cronos a similar pattern shows. Short interest hit a 5.5 percent low in mid-December, and a 15 percent high in mid-January. By months end, the level was practically unchanged at 14.2 percent.
The next three top performers HEXO (HEXO) at 50 percent, Supreme Cannabis (FIRE.V) 48 percent and Organigram Holdings (OGRMF) 47 percent, nearly identical patterns existed. The one exception was Supreme Cannabis where the short selling position was higher at month end than any time during the month. If anything, that is a bullish signal.
What does this all mean?
My apologies for the boring statistics but there is a message here. Short sellers are notorious for doing their homework, not simply acting on emotion. So to consider how short selling is so small, especially given the newsworthiness of cannabis and the volatility of the stocks, is a very positive thing.
Another positive factor is how the January month-end short levels remain near mid-month highs. These folks represent future buyers.
In the final analysis: FOMO
In the absence of unexpected good news in the cannabis world and the absence of any meaningful short squeeze, it is clear that stock prices benefitted from a strong dose of investor FOMO- the fear of missing out. Passage of the farm bill may have triggered the rally, but FOMO was quick to follow. But now with prices over extended and a pullback likely, investors who missed the January fiesta can celebrate the Joy Of Missing Out (JOMA).
There will be opportunities down the road to exercise your right to FOMO. That’s because there is a good chance that cannabis stocks will be one of the top performing groups of 2019.