Major Blast-Off for Marijuana Stocks on Horizon
While the marijuana sector is in high-growth mode, the same cannot be said for weed stocks, which have been under attack on the price charts over the past three months.
Analyzing pot stocks is not based on the fundamentals, since the majority of companies in the marijuana space are currently making huge capital expenditures on building their infrastructure, which ultimately cuts into margins and adds to losses.
The current selling pressure in marijuana stocks has been triggered by a move away from the risk-on trade, as the macro environment grows riskier.
Simply put, traders have been dumping high-risk pot stocks, instead desiring the increased safety of large-cap stocks and bonds.
Moreover, we have been seeing mixed results from pot companies, namely lower-than-expected sales and higher costs. In reality, some marijuana companies will face a cash crunch and could find it more difficult to raise capital.
Some weed companies will be taken over by the bigger players and I expect a period of consolidation in the sector that will flush out the weaker companies.
Near-Term Technical Picture Looks Shaky, But…
Using technical analysis, you can see the current flush amid marijuana stocks. Most of them have plummeted to near their 52-week lows, with signs of moving lower.
But while the short-term technical picture for the marijuana sector is neutral to bearish, like any sector sell-off, I expect a relief rally based on the oversold technical conditions.
There are, or will be, aggressive opportunities to pick up good weed stocks at cheaper prices.
A look at the widely followed Horizons Marijuana Life Sciences Index ETF (OTCMKTS:HMLSF, TSE:HMMJ) displays the carnage ravaging pot stocks. The exchange-traded fund (ETF) includes the majority of the leading and up-and-coming marijuana stocks, hence it’s a decent barometer of the marijuana sector.
Chart courtesy of StockCharts.com
From a technical viewpoint, the Horizons Marijuana Life Sciences Index ETF is currently threatening to retest its December 23 low of $13.43, and it is down 44.3% from its 52-week high of $27.00 on October 16, 2018.
The above chart shows the ETF moving into a bearish death cross pattern around $18.00 in June. A death cross is a situation when the 50-day moving average crosses below the 200-day moving average.
In this chart formation, the group of pot stocks in the ETF are witnessing excessive near-term selling pressure that drives prices lower.
Unless there is a recovery in buying, the Horizons Marijuana Life Sciences Index ETF could slip lower toward the multi-year support around $14.60 to the December low.
So while the short-term technical picture looks precarious for marijuana stocks, my view is the market uneasiness is not a surprise, given the newness of the legal pot sector.
Longer-term, the expected strong demand for legal cannabis, especially in the U.S. market, will provide the catalyst for much higher moves for weed stocks.