Oct. 17, 2018, 4:24 a.m. EDT

What could hurt marijuana stocks? Too much love from investors

Investors need to be on the lookout for when marijuana stocks have extremely positive sentiment, a contrarian indicator

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By Nigam Arora


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There is excitement about marijuana becoming legal in Canada. Many investors are eager, but astute investors are careful. The reason astute investors are careful is because they know from experience that many will make millions in marijuana stocks but many more will go bust.

In response to 11 pointers I gave to marijuana investors in “How to potentially become a marijuana millionaire, albeit carefully,” investors were asking me to identify the one stock to buy. I recommended Canopy Growth /zigman2/quotes/200603886/composite CGC -3.12% stock. Please see “If you buy only one marijuana stock, this should be it.” At that time, Canopy Growth stock price was $47.65. Subsequently the stock ran to $59.20. The Arora Report buy signal was given at $31.15.

Let’s explore this update of Canopy Growth with the help of two charts.

Charts

Please click here for an earlier annotated chart of Canopy Growth. For the sake of transparency, this is exactly the same chart, without any changes, that was previously published.

Please click here for an updated annotated chart of Canopy Growth. Please note the following:

• The chart shows the technical breakout in Canopy Growth stock. On the breakout, we previously shared the following with Arora Report subscribers: Historically, this type of breakout has a high probability of failing and causing losses for investors who buy the breakout. However, due to legalization in Canada, there is no historical precedent for marijuana stocks on marijuana becoming legal in Canada.

• Canopy Growth bought the intellectual property of a Colorado-based company, Ebbu.

• This purchase created excitement for the future of Canopy Growth. The stock started running up and ultimately broke out from the resistance shown on the chart.

• In theory, the purchase is dilutive for Canopy Growth stockholders as more stock is being issued to buy Ebbu assets. However, Canopy Growth stock moved up many times more than could have been justified based on the fundamentals of the purchase. This clearly demonstrates that, right now, marijuana stocks are driven by sentiment and not by fundamentals.

• The chart shows the Arora buy signal.

• The chart shows that volume increased but did not go as high as it has in the past. This is a negative.

• RSI (relative strength index) is overbought and is a negative.

• The chart shows that the smart money is selling into the strength. In plain English, this means sell trade-around positions but hold core positions. A technique we use at The Arora Report to often double the returns and lower risks is to surround core positions with trade-around positions.

• Please note that marijuana stocks provide diversification because they often do not move with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.20% and popular ETFs such as S&P 500 ETF /zigman2/quotes/209901640/composite SPY -0.07% , Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ -0.23% and small-cap ETF /zigman2/quotes/209961116/composite IWM -0.48% .

/zigman2/quotes/200603886/composite
US : U.S.: NYSE
$ 18.65
-0.60 -3.12%
Volume: 5.28M
Nov. 13, 2019 2:37p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$7.06 billion
Rev. per Employee
$115,039
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
27,745.79
+54.30 +0.20%
Volume: 159.27M
Nov. 13, 2019 2:37p
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/zigman2/quotes/209901640/composite
US : U.S.: NYSE Arca
$ 308.79
-0.21 -0.07%
Volume: 34.05M
Nov. 13, 2019 2:37p
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/zigman2/quotes/208575548/composite
US : U.S.: Nasdaq
$ 201.07
-0.47 -0.23%
Volume: 10.63M
Nov. 13, 2019 2:37p
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/zigman2/quotes/209961116/composite
US : U.S.: NYSE Arca
$ 158.06
-0.77 -0.48%
Volume: 9.45M
Nov. 13, 2019 2:37p
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