Buy the rumor, sell the news. It is probably the most common stock market adage, yet so many fail to see it coming. It’s happened in the Cannabis industry twice over the last year. First, was after the US election as Cannabis stocks in the US and Canada skyrocketed into the US ballot initiatives when 9 States voted to legalize cannabis for either recreational or medicinal use. Of course, most notable was California, the 6th largest economy in the world, which voted to legalize recreational cannabis.
Canadian stocks rallied alongside the US during the ballot catalyst. This was quite logical considering many Canadian companies have operations in, or ownership of, US companies. Of course, speculation is that favorable laws regarding cannabis in the US will inevitably invite more opportunity for Canada to enter the US market as well. The day after the vote both US and Canadian stocks opened green, yet closed red, then fell for several months after with few exceptions.
The second “buy the rumor sell the news” event occurred into the date of the official proposal of legislation to legalize recreational cannabis in Canada. Canadian cannabis stocks had gone exponential until quite literally the day the proposal was announced. After the announcement, swift consolidation began and it took several months before a bottom was found. Both of these events are illustrated via the Canadian Marijuana Index (chart below).
These events are important to note because a similar event will occur the first of this week, albeit much more significant than either of the previous catalyst events in the US and Canada. Namely the House of Commons is to vote on C-45 the Bill to legalize recreational cannabis, and we should know the outcome by Tuesday. The industry has been flooded with positive developments over the course of the last couple months sending the Canadian Marijuana Index into the stratosphere closing near 410 Friday after a low of 200 set in July. This vote may very well be the catalyst event that creates the blow-off top everyone knows is coming.
An exponential rise necessitates a correction, nothing can move at such a trajectory indefinitely. I’m not looking to create a panic, but risk management is paramount for successful trading and/or investing especially in times of over exuberance. Be fearful while others are greedy comes to mind.
Once C-45 passes through the House, investors will be forced to look to the more speculative and less certain outcome of the Senate’s passage of the Bill. There has already been some push-back from Senators regarding the timeline of implementation and some other minor issues as well. It is worthy to note that there is virtually no resistance to legalization itself, merely the specifics. However, this does point to a potential change in sentiment.
I am still extremely bullish on the long term prospects for the industry, but it should not come as a surprise to anyone when an exponential move corrects itself. Any dip will, in my view, be a great opportunity for longer term investments and a time to re-position into solid companies in anticipation of the implementation of recreational cannabis be it July, or at a later date.