By Nigam Arora
• Marijuana stocks often do not correlate well to the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.17% , S&P 500 ETF /zigman2/quotes/209901640/composite SPY +0.07% and Nasdaq 100 ETF /zigman2/quotes/208575548/composite QQQ -1.15% .
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A short squeeze occurs when short sellers either panic or are compelled to buy to cover shares that were previously short sold. This leads to a lot of artificial buying that is not based on fundamentals.
Often the trigger for a short squeeze is good news, even slightly good news. Marijuana stocks are especially prone to short squeezes.
The chart shows the relative rankings of the five select popular marijuana stocks. Those rankings are based on the six screens of the ZYX Change Method. Please click here to learn about the six screens.
Risk-adjusted rankings are more useful for medium-term and long-term positions. Non-risk-adjusted rankings are more useful for short-term positions or trade-around positions.
What to do now
There are millions to be made in marijuana stocks. However, these stocks are volatile. Volatility will cause many to lose their shirts. Segmented money flows are the best tool to keep your marijuana investments prudent.
Investors ought to learn Arora’s 15th Law of Investing and Trading: Trade-around positions dramatically increase returns and reduce risks. If you have been carefully watching marijuana stocks over the past couple of years, you can easily see how much more money you would have made with less risk if you were following Arora’s 15th Law. The concept is to slowly accumulate core positions for the very long term at favorable prices and surround them with short-term trades in marijuana stocks.
Those not in marijuana stocks may consider waiting patiently for signals to buy them. Right now marijuana stocks are oversold in the short term. When marijuana stocks are oversold, they tend to bounce. However, the risk here is the momo crowd. Since the momo crowd is sitting on large losses, if the momo crowd starts selling on a rally to reduce losses, marijuana stocks could take another leg lower. Please understand that nothing is cast in stone.
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Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.