Cannabis stocks have been on a tear over the past six months or so as legalization and acceptance for both medical and recreational use at the state level spreads in the U.S., Canada has fully legalized, and select countries globally consider a change to their long-standing policies. Even the relatively conservative World Economic Forum in Davos had a presence from cannabis-related companies this year.
The potential tipping point for the industry is when the U.S. legalizes at the federal level. That process may now accelerate as Cory Booker, who joined the Democratic race for the White House last week, is calling for an end to marijuana prohibition. The topic will certainly be part of the current presidential election cycle.
Leading stocks in the sector have good-sized price swings and can present attractive opportunities on both the long and short side for traders and active investors who are patient and wait for the right situation to develop. Of course, volatility increases risk as well as opportunity, and therefore, an active risk management component needs to be a part of any engagement plan.
Three leading stocks and one cannabis exchange-traded fund (ETF) are considered below. Currently, in three out of four cases, the security is extended and can be watched for a new entry situation to develop relative to your personal approach and risk management regime. This next table shows year-to-date (YTD) performance as of last week's close.
The YTD relative performance can also be seen on this next comparison chart.
This next graphic compares performance over approximately six months. You can see how Tilray, Inc. (TLRY) really separated from the pack starting around September. It has since come back down and more recently has lagged, as can be seen in the YTD performance chart above.
These next two charts provide an example of the degree of swings that can be seen within the selected cannabis listings. The first is a weekly chart for Canopy Growth Corporation (CGC). This stock is up $22.01 or 81.9% YTD and has had swings of more than 33.0% since January 2018.
Next is the chart for Tilray stock, which also shows a minimum swing of 33% since September. Prior moves are not included here, as the company went public on the NASDAQ in July. Recently, volatility in Tilray stock has been muted as it consolidates, with YTD performance of only 16.1%. However, as discussed below, Tilray is currently in a more advantageous position for a future upswing, as each of the other three listings discussed are extended at this point.
Canopy Growth Corporation (CGC)
Canopy Growth stock is back above its 200-day exponential moving average (EMA) after trading below it at the end of last year and into the beginning of 2019. The 200-day EMA has provided support for most of its long-term uptrend.
Canopy Growth shares hit a swing low of $25.26 in late December and then proceeded to rally 101.8% as of last week's $50.99 high. The stock is now well overbought based on the 14-day relative strength index (RSI) momentum oscillator, which reached a high of 82.90 last week. The stock also just about tapped the 78.6% Fibonacci retracement level ($52.04) of the most recent decline, where some resistance might be seen. Either way, waiting for a pullback or some consolidation should provide better risk/reward at this point. Earnings are expected from Canopy on Feb. 14.
Cronos Group Inc. (CRON)
Cronos Group Inc. (CRON) stock is also very overbought on the daily RSI after reaching a high of $21.79 last week and completing a 161.8% ABCD projection ($21.64). In addition, the initial measuring objective for a large symmetrical triangle was reached at $21.43. Cronos Group stock was up 126.98% as of last week's high when measured from the $9.56 swing low hit only 26 trading days ago. Earnings are anticipated from the company on Feb. 12.
Cronos Group stock has held support of its 200-day EMA for most of its long-term uptrend and is now well above that level. Four weeks ago, the stock broke out of a multi-month symmetrical triangle consolidation pattern ($13.39 breakout level) and took off from there. A retracement back toward prior resistance of the triangle (approximately $15.30 to $13.95) would be warranted before a continuation of the uptrend can be sustained. Also, watch the Fibonacci price zones noted on the chart below for potential support.
ETFMG Alternative Harvest ETF (MJ)
Since the ETFMG Alternative Harvest ETF (MJ) is an ETF, it provides wide exposure to the sector. Therefore, investors would expect volatility for the fund to be generally lower than it is for individual listings. This can help when adding exposure to cannabis stocks to a portfolio and can make it easier to manage risk. Canopy, Cronos and Tilray are among the ETF's top five holdings.
Last week, MJ completed a 61.8% Fibonacci retracement at $36.16 as it hit a high of $36.38. The ETF is now back above its 200-day EMA following a 49.3% correction off the $45.40 record high from September, and the 200-day EMA has started to curve up again. If a pullback does occur in the near term, watch for potential support to hold strong around the 200-day EMA, which has now just about merged with the minimum anticipated Fibonacci retracement of 38.2% at $31.27.
Tilray, Inc. (TLRY)
Following its IPO at $17, Tilray opened on NASDAQ at $23.05 on July 19, 2018. It then proceeded to rally to an intraday high of $300 just 43 days later in mid-September, thereby completing a 1,200% advance. Subsequently, the stock moved into a significant retracement, with a low found at $64.06 in mid-December. Since then, Tilray stock has been attempting an advance, with the first higher swing high of a potential developing uptrend hit two weeks ago at $70.00. However, it has been lagging the group and is below its 200-day EMA.
A daily close above last week's high of $83.40 could signal a bullish continuation. Nevertheless, earnings are estimated to be released on Feb. 12, and the market might wait until then to get this stock moving again.
The Bottom Line
Volatility in cannabis stocks can present opportunities not as easily found in other sectors at this time. It is important for potential investors to be patient, stalk, track and prepare for new swings. Several of the listings in the sector are extended and due for a retracement, while one (Tilray) may be ready to move soon.